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©2014 International Monetary Fund

IMF Country Report No. 14/253

TUVALU 2014 ARTICLE IV CONSULTATION—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR TUVALU

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2014 Article IV consultation with Tuvalu, the following documents have been released and are included in this package: The Staff Report prepared by a staff team of the IMF for the Executive Board’s

consideration on August 25, 2014, following discussions that ended on May 28, 2014, with the officials of Tuvalu on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 5, 2014.

An Informational Annex prepared by the IMF.

A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.

A Press Release summarizing the views of the Executive Board as expressed during its August 25, 2014 consideration of the staff report that concluded the Article IV consultation with Tuvalu.

A Statement by the Executive Director for Tuvalu.

The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

International Monetary Fund Publication Services PO Box 92780 Washington, D.C. 20090

Telephone: (202) 623-7430 Fax: (202) 623-7201 E-mail: [email protected] Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund Washington, D.C.

August 2014

TUVALU

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION

KEY ISSUES

Overview. Large revenues from fishing licenses, together with substantial foreign aid,

facilitated a sizable budget surplus in the past two years but also an expansionary

budget in 2014. The large increase in budget spending is set to cause some inflationary

pressure. More importantly, the likely difficulties in unwinding the budget expansion and

potential liabilities arising from weaknesses in state-owned banks and public enterprises

make fiscal sustainability a major concern over the medium to long run.

Outlook and risks. Growth prospects are generally positive owing to several large

infrastructure projects financed by development partners that are planned to be

implemented over the medium term. Inflation is expected to rise moderately, reflecting

rapidly growing government expenditure and substantial public sector wage increases.

Near-term risks mainly stem from elevated banking sector vulnerabilities, while, over the

medium to long run, growth prospects may be hampered by the dominance of

inefficient public enterprise in the economy, uncertainty in the fisheries sector, and weak

competitiveness.

Policies. Policy discussions focused on fiscal sustainability and resource revenue

management, financial stability, and structural reforms to engender sustained, inclusive

growth. Key recommendations include:

Unwind the large budget expansion in 2014, conduct fiscal consolidation, and, over

the medium term, introduce a fiscal framework that targets a structural fiscal surplus;

Establish a regulatory framework and conduct a complete diagnosis of the banking

system as soon as feasible;

Develop a reform plan for public enterprises, with a focus to clearly define and cost

social responsibilities and enhance transparency and accountability; and

Continue to implement reforms toward inclusive growth, including through an

improved business environment, enhanced vocational training, and greater efforts to

explore job opportunities both at home and abroad.

August 5, 2014

TUVALU

2 INTERNATIONAL MONETARY FUND

Approved By Brian Aitken

and Vikram Haksar

Discussions took place in Funafuti during May 21–28, 2014. The team

comprised Mr. Yu (Head), Ms. Jung (both APD), Ms. Sian (SEC),

Mr. Yang (Resident Representative), Ms. Pan (World Bank), Ms. Olsson,

and Mr. Lototele (both ADB). Mr. Yoon and Mr. Moon (both OED)

participated in the discussions

CONTENTS

CONTEXT_________________________________________________________________________________________ 3

BACKGROUND ___________________________________________________________________________________ 4 A. Recent Developments __________________________________________________________________________ 4 B. Outlook and Risks ______________________________________________________________________________ 5

POLICY DISCUSSIONS ___________________________________________________________________________ 6 A. Fiscal Policy and Public Financial Management ________________________________________________ 6 B. Financial Stability _______________________________________________________________________________ 9

C. Public Enterprise Reform ______________________________________________________________________ 10

D. Promoting Inclusive Growth __________________________________________________________________ 10

E. Other Issues ___________________________________________________________________________________ 11

STAFF APPRAISAL _____________________________________________________________________________ 11

BOX

1. External Sector and Exchange Rate Assessment _______________________________________________ 13

FIGURES

1. The Setting in a Cross-Country Context _______________________________________________________ 14

2. Economic Developments ______________________________________________________________________ 15

3. Fiscal Developments ___________________________________________________________________________ 16

TABLES

1. Selected Social and Economic Indicators, 2010–2015__________________________________________ 17

2. Illustrative Medium-Term Baseline Scenario, 2010–2019 ______________________________________ 18

3. Summary Operations of the General Government, 2010–15 (GFS 1986) _______________________ 19

4. Summary Operations of the General Government, 2010–15 (GFS 2001) _______________________ 20

5. Balance of Payments, 2010–19 ________________________________________________________________ 21

6. Assets and Liabilities of the Banking Sector, 2007–13 _________________________________________ 22

APPENDIXES

I. Risk Assessment Matrix ________________________________________________________________________ 23

II. Policy Reform Matrix—Policies and Progress of Implementation ______________________________ 24

III. Climate Change—The Economic Impact on Pacific Island Economies _________________________ 25

IV. Pacific Islands—Are Fishing Resources Renewable? __________________________________________ 26

V. Seafarers’ Employment and Remittances in Kiribati and Tuvalu _______________________________ 27

VI. Public Enterprises in Tuvalu ___________________________________________________________________ 28

TUVALU

INTERNATIONAL MONETARY FUND 3

CONTEXT

1. Tuvalu is one of the smallest and most isolated countries in the world. With a

population of some 11,000 people living on 26 square kilometers, Tuvalu is more than 3,000

kilometers away from its nearest major external market (New Zealand). The country faces

tremendous challenges stemming from its remoteness, lack of scale economies, weak institutional

capacity, and, above all, climate change and rising sea levels, which threaten the country’s very

existence. (Appendix III)

2. Income is relatively high, but the economy is fragile. Fishing revenues and foreign aid, as

well as remittances, have significantly raised living standards—absolute poverty is rare, access to

primary education is effectively universal, and per capita income is among the highest in the group

of small Pacific island countries. Nevertheless, fishing revenues and foreign aid are highly volatile

and uncertain (Appendix IV), and could experience a secular decline over the medium to long run,

while remittances have not recovered to the level prevailing before the global financial crisis mainly

as a result of limited human capacity, pointing to weak competitiveness (Appendix V). The

authorities have limited policy space to maneuver—fiscal policy is the only macro policy lever given

the use of the Australian dollar as the legal currency; there is little scope for diversifying the small

economy that is dominated by inefficient public enterprises; and the lending capacity of banks is

constrained by severe asset quality problems. These factors make it all the more important to

develop a sound fiscal policy framework, address weaknesses in banks and public enterprises, and

foster a favorable business environment for the private sector.

3. Tuvalu holds large assets abroad and also owes substantial debt. The Tuvalu Trust Fund

(TTF), originally capitalized by development partners in 1987, aims to provide additional funding for

budget support. Holdings are global, but Australian assets are weighted heavily. The TTF is not fully

sovereign and cannot be drawn down freely: when its market value exceeds a “maintained value”

indexed to Australian CPI, the TTF Board—representing both development partners and Tuvalu

government—can decide to transfer the excess to the budget. TTF’s market value dropped markedly

during the global financial crisis, but has since recovered steadily to more than $A 140 million (3.5

times of GDP). The Consolidated Investment Fund (CIF) serves as a fiscal buffer and deposit account

for development partners’ grants, and can be drawn down freely at the authorities’ discretion.

Thanks to large fiscal surpluses achieved in the past two years, CIF has been built up to more than

$A 15 million (38 percent of GDP). Meanwhile, Tuvalu’s public debt has reached 41 percent of GDP

by end-2013, with external debt—including public enterprise debt on commercial terms—

accounting for 35 percent of GDP. The debt is projected to rise sharply to 56.9 percent in 2014 on

account of a new loan agreement taken on by a fishing joint venture to finance the expansion of its

fishing capacity—the loan could, as usual, be guaranteed by the government.

4. The authorities are cognizant of the challenges and have developed a broad reform

agenda. A policy reform matrix (PRM), formulated in consultation with development partners, has

been fleshed out in an effort to enhance governance and social development, facilitate private

sector growth, and safeguard macroeconomic stability. (Appendix II) Significant progress has been

TUVALU


made in the first two phases of the PRM to enhance public financial management, while measures

undertaken to rationalize social spending and strengthen public enterprises have witnessed limited

success. The authorities are designing the third phase of PRM in close consultation with

development partners.

5. Tuvalu has entered into an electoral cycle. The general elections are expected to be held

by March 2015.

BACKGROUND

A. Recent Developments

6. Growth has been weak while inflation picked up moderately. Real GDP growth has been

volatile averaging only 1 percent in the past decade. Activity has benefited from increased

competition in the retail sector and a recent boom in the fisheries sector, while banking weaknesses

constrain the financial support for the private sector, and the poorly managed public enterprises

strain government finances and worsen the country’s business climate. Inflation rose to 3 percent by

end-2013, largely reflecting a pickup in nonfood inflation. It benefited from lower global food and

commodity prices, as well as trade diversification and increased retail competition, but prices rose

on account of a weakening Australian dollar.

7. The balance of payments has been supported by large fishing-related receipts and

official aid. Owing to the introduction of the Vessel Day Scheme and the establishment of fishing

joint ventures with Asian companies, both fishing exports and fishing license fees have more than

doubled in just a few years, with each accounting for about half of GDP now.1 Foreign aid, including

both budget support and off-budget project financing, has also hovered at around half of GDP.

However, remittances, which used to be one of the most important sources of foreign exchange

inflows, have shrunk dramatically since the global financial crisis, to 10 percent of GDP compared to

the pre-crisis levels of nearly 20 percent. Imports, which closely correlate with fiscal spending, have

been generally stable.

8. The budget achieved a substantial surplus for the second consecutive year in 2013.

Fishing license fees reached a record high in 2013 because of improved negotiating power under

the Vessel Day Scheme and increased revenues under the bilateral treaty with the U.S. government.

Tax revenue outperformed the budget target largely as a result of improved compliance following a

tax audit of public enterprises and the favorable performance of a fishing joint venture as well as a

VAT rate increase. These developments were further reinforced by higher-than-expected foreign

grants. Current spending was generally restrained, and on-budget capital spending was small,

reflecting the government’s weak implementation capacity. As a whole, the fiscal surplus reached

26.3 percent of GDP.2

1 The Tuvaluan government holds around 50 percent of the joint venture’s shares.

2 Extrabudgetary spending supported by project financing from development partners have been around 25 percent of GDP.

TUVALU


9. Vulnerabilities of banks and public enterprises have further aggravated structural

weaknesses. In the unsupervised state-owned dual-bank system, asset quality remains poor as half

of the loan portfolio is nonperforming, which is caused to a large extent by government-sponsored

programs implemented a few years ago and public enterprise borrowing. Although both banks, i.e.

the National Bank of Tuvalu (NBT) and Development Bank of Tuvalu (DBT), have restricted their

exposure to public enterprises and made substantial provisions, an accurate estimate of capital

adequacy is impeded by the lack of a regulatory framework. The DBT—accounting for

about10 percent of banking sector assets—has made substantial losses, with its net capital depleted

from $A 2.5 million (7.2 percent of GDP) to $A 0.7 million (1.7 percent of GDP) in the past three

years. The DBT further experienced a sharp drop in deposits in 2013 as depositors were concerned

with its capacity to service obligations. Meanwhile, non-bank public enterprises, with some being

insolvent already, accumulated losses of more than 3 percent of GDP in the past few years, leaving

this sector’s total capital below 0.5 percent of GDP. (Appendix VI) The immense losses incurred by

public enterprises represent deficiencies in governance and the cost of social responsibilities.

10. There is no sign of significant exchange rate misalignment. The real effective exchange

rate depreciated over the past year and has returned to its 10-year average on the back of a

weakening Australian dollar. However, the economy’s competitiveness remains weak, with

remoteness causing high transportation cost and isolation, and the lack of scale increasing

transaction cost. The large budget expansion could exert inflationary pressure and cause real

exchange rates to appreciate, undermining competitiveness. (Box 1)

B. Outlook and Risks

11. Near-term risks mainly stem from banking sector vulnerabilities, while fiscal

sustainability remains a major concern over the medium to long run. Several infrastructure

projects financed by grants from development partners (amounting to more than 40 percent of

GDP) are expected to come on stream in the next three years, and may boost growth to 2.5 percent,

while weak capacity and competitiveness will continue to impede growth over the long run.3

Macroeconomic and financial risks are elevated. In the near term, the impaired balance sheet of the

DBT could further weaken its lending capacity, constitute a drag on growth in the private sector,

and, more importantly, threaten macro-financial stability and undermine business confidence. Over

the medium to long run, maintaining fiscal sustainability remains the most important challenge—the

debt sustainability analysis suggests a high risk of debt distress under the baseline; fishing revenues

are highly uncertain and face downside risks; and contingent liabilities, mostly associated with state-

owned banks and public enterprises, are substantial.

12. The external account may deteriorate over time. The large inflows of foreign grants

would be offset by rising imports as a result of increased budget spending and public investment.

With the depletion of the CIF, foreign exchange reserves are projected to decline from 9 months of

3 The spending on these large projects would be extrabudgetary.

TUVALU


imports to 5 months over the medium term. The balance of payments is subject to significant risks.

Fishing license fees will likely remain buoyant over the medium term, but may decline over the long

run because of climate change and overfishing. Remittances by seafarers and seasonal workers

might weaken if the risk of protracted slower growth in advanced and emerging economies

materializes or China’s economy further slows, affecting growth and job opportunities in the Pacific

region. The impact of U.S. tapering is uncertain—the tapering could cause the Australian dollar to

further depreciate and improve Tuvalu’s competitiveness, but a disorderly tapering may increase

volatility in Australia’s asset markets where the TTF is invested, generating fluctuations in the TTF’s

market value and likely transfers to Tuvalu’s budget.

Authorities’ Views

13. The authorities generally agreed with the staff’s views on the economic outlook. They

indicated that the weak growth may result from a lack of large projects, and expect growth to pick

up in the next few years as several large projects start to be implemented. They also anticipated

balance of payments pressure in light of the uncertainty in fishing-related receipts.

POLICY DISCUSSIONS

The key policy agenda is to develop a medium-term fiscal framework that anchors a sustainable fiscal

policy; address risks in the banking sector by establishing a regulatory framework; enhance the

efficiency of public enterprises, and foster inclusive growth and competitiveness via continued

structural reforms.

A. Fiscal Policy and Public Financial Management

14. Despite sound fiscal performance in the past two years, a dramatic expansion of

budget spending in 2014 has substantially increased risks to fiscal sustainability. The 2014

budget continues to target a surplus, with a large temporary increase of foreign grants and TTF

transfers financing a more than 20 percent

expansion of spending, which is mostly one-off

increases of current expenditure and includes a

25 percent rise in civil servant salary and a

potentially costly revival of the Tuvalu Cooperative

Society (TCS), which would supplement the supply

of necessities to outer islands by private retailers4.

The large salary increase has also induced public

enterprises to increase employee wages by the

same magnitude, adding to their operational costs.

4 Tuvalu Cooperative Society (TCS) is owned by Tuvaluan people and used to be the main wholesaler and retailer. With increasing

competition from private retailers, the TCS was forced to terminate most of its operations after incurring large losses. The TCS

currently holds arrears of $A 2.5 million against external suppliers and domestic banks.

0

5

10

15

20

25

30

0

2

4

6

8

10

12

14

16

18

Wages Social 1/ Goods and

services

Grant,

subsidies &

CSO

Capital Others

2013 2014 budget Percent change (RHS)

Expenditure Breakdown(In millions of Australian dollars unless otherwise specified)

Sources: Tuvalu authorities.

1/ Includes Tuvalu Medical Treatment Scheme, scholarship programs and Special Development

Expenditure.

TUVALU


With on-budget foreign grants returning to historical average levels, the budget would move into a

deficit from 2015 onwards and fully deplete the fiscal buffers over the medium term unless the

spending increase is unwound.

15. Medium-term fiscal risks arise from several sources. First, tax revenue might shrink as the

tariff rates that apply to regional trade are cut under the Pacific Island Countries Trade Agreement

(PICTA).5 Second, there is a risk that fishing revenue might decline after its recent rapid increase as

overfishing and climate change adversely impact fishing resources. Finally, vulnerabilities in banks

and public enterprises may pose substantial liabilities to the government—bringing the capital of

insolvent non-bank public enterprises to positive would cost at least 4 percent of GDP, while the

cost of addressing banking vulnerabilities needs to be assessed under a regulatory framework. The

government’ guarantee of public enterprise debt, notably including external loans borrowed by the

fishing joint ventures, also constitutes contingent liabilities.

16. To enhance fiscal sustainability, consolidation efforts are needed. Tax administration

should be further strengthened, including through legal actions on non-compliance, and a tax policy

review would be necessary given the uneven cost-benefit among different taxes. However, given the

narrow economic base, the scope for further increases in tax revenue is limited, and most of the

fiscal consolidation would more likely be achieved via expenditure control in the near term. To put

the fiscal policy on a sustainable footing, the government expenditure should be scaled down from

the 2014 budget level at 93 percent of GDP to about 80 percent of GDP in the next three years when

the impact of budget spending cut on growth would be offset by the implementation of large

infrastructure projects financed by development partners. To achieve this target, spending should be

largely frozen—which would bring down its share in GDP to 84 percent within three years—while a

few rapidly growing expenditures should be cut back. For example, although rolling back civil

servants’ salary increase may be difficult, expenditures on goods and services as well as grants and

subsidies—all budgeted to grow by double digits—should be put under tight scrutiny on the back

of the newly introduced procurement mechanism and the PRM framework, and be reined in to the

extent feasible. Moreover, reviving TCS would require additional financial support, which could cost

10 percent of GDP to clear arrears and regain market share. The authorities should explore more

cost effective policies to supply necessities to the outer islands. Additionally, there is considerable

room to improve the cost effectiveness of social programs such as the scholarship program and

Tuvalu Medical Treatment Scheme (TMTS), which finances overseas treatment of Tuvaluan patients.

Last but not least, the government should refrain from providing guarantees for public enterprise

borrowing given the already high risk of debt distress.

17. Beyond fiscal consolidation, a new medium-term fiscal framework is needed to ensure

fiscal sustainability, address procyclicality and build buffers in view of the daunting

challenges facing Tuvalu. Under this framework, the transfers between the budget, the CIF, and the

TTF should follow a clear rule anchored by a structural balance target:

5 Under PICTA, tariff rates for the trade among Pacific island countries will be cut to zero by 2015, and this rate cut would be

deferred to 2017 for the least developed countries including Tuvalu.

TUVALU


Targeting a structural balance would reduce expenditure fluctuation as a result of revenue

volatility. Given the weak capacity, staff suggests a simple approach to estimate the structural

revenue, where fishing license fees are adjusted to reflect their moving average. As fishing

license fees have been increasing markedly, targeting a structural balance would imply saving a

portion of these fees for the time being. Staff estimates that, with the CIF already built up to a

comfortable level, a structural surplus of 0.5-1 percent of GDP is needed to maintain fiscal

buffers and bring down the risk of debt distress from high to moderate over the medium and

long run.

To help achieve the structural balance target, the CIF should be transformed into a fiscal

stabilization fund that follows a clear rule of accumulation and withdrawal—temporary windfalls

from fishing revenues should be saved in the CIF and it can be drawn down when there is a

revenue shortfall.

The TTF should serve as a rainy day fund, with the returns on investment saved in a reserve

account for use in the event of severe adverse shocks.

18. Marked progress has been made in strengthening public financial management.

Notably, a central procurement unit has been established, and associated regulations adopted. The

authorities also published a budget manual outlining the budget process and policies, strengthened

the monitoring of outer island budget operations, and started releasing monthly reports of budget

execution, which significantly enhanced transparency and facilitated budget control.

19. Nevertheless, there is scope to further strengthen public financial management to

improve transparency and safeguard fiscal resources. The budget process needs to be anchored

by a sustainable medium-term fiscal framework that incorporates development objectives. The

management of fishing license fees should be streamlined, with a focus to reconcile the treasury

receipts and the sale of licenses by the Fisheries Department. Introducing a commitment control

system would further improve budget management. Over the medium term, a wage-setting

mechanism is necessary to ensure that public sector wage increases are in line with productivity

gains in the economy.

-20

-10

0

10

20

30

40

50

60

0

5

10

15

20

25

30

35

40

2011 2012 2013 2014

Proj.

2015

Proj.

2016

Proj.

2017

Proj.

2018

Proj.

2019

Proj.

CIF (LHS; $A mil.) - baseline

CIF (LHS; $A mil.) - alternative 1/

Fiscal balance (RHS; % of GDP) - baseline

Fiscal balance (RHS; % of GDP) - alternative 1/

Baseline and Alternative Scenarios

Source: IMF staff estimates and projections.

1/ The alternative scenario assumes a structural surplus of 0.5-1 percent of GDP over the long run.

TUVALU



20. The authorities shared staff’s views on fiscal sustainability risks. They worry about the

lack of transparency in the TMTS and its potential overspending, and intend to contain its cost by

establishing a comprehensive database and closely following patients’ treatment schedules. They

also agreed to carefully estimate the cost of reviving the TCS and consider alternative options as

needed. On debt sustainability, they generally concur with staff assessment, but indicate that the

contingent liabilities from fishing joint ventures are not a key concern as the joint ventures have a

favorable outlook and the probability for the government to assume their debt obligation is small.

21. The authorities agreed with the staff’s proposal on introducing a medium-term fiscal

framework. They share the concern about revenue volatility, and support the suggestion to have

the fiscal policy anchored by a structural balance and make the TTF a rainy day fund, with its

investment returns saved in a reserve account for large adverse shocks.

22. The authorities are committed to further enhancing public financial management. They

are developing the IT system to better reconcile fishing license fees between the Treasury and

Fisheries Department. They will also aim to further improve public financial management when

implementing the third phase of PRM.

B. Financial Stability

23. Given substantial vulnerabilities in the banking sector, there is an urgent need to

establish a framework of banking supervision and resolution. The NBT’s financial risk appears

under control given the sound profitability as indicated by a return on assets of around 3 percent

and comfortable capital equivalent to 24 percent of total assets, although these need to be verified

under a prudent regulatory framework. The rapid deterioration of the DBT’s financial position points

to a looming solvency issue. This would imply spillover risks across the banking system, which may

be limited by the DBT’s small market share and relatively simple financial linkages, and perhaps

more importantly, result in large government liabilities: the budget would need to allocate resources

to repay the bank’s borrowing guaranteed by the government (1.4 percent of GDP). Moreover, fresh

capital may eventually need to be injected into the banking system should an assessment based on

prudent standards suggest—given the underdeveloped private sector and its limited financial

capacity as well as the unsuccessful experience of privatizing public enterprises, introducing private

capital could be challenging, and resorting to budget resources would still be likely. Going forward,

the priority is to implement a banking supervisory and regulatory framework—in particular, a Bank

Commission needs to be established and supervisors employed as soon as feasible with due regard

to controlling administrative costs. Given Tuvalu’s limited capacity and the need for arm’s-length

supervision, development partners’ support for this initiative will be crucial.6 The financial condition

of the banking sector and its implications for the economy, e.g. the cost of a possible

6 The mission suggested that the authorities contact the Pacific Financial Technical Assistance Centre (PFTAC) for

technical assistance as soon as feasible.

TUVALU


recapitalization, should be assessed urgently on the basis of prudential standards, and a banking

resolution framework needs to be set up.


24. The authorities are cognizant of the need to strengthen the banking sector. They are

considering establishing the Bank Commission as stipulated by the law, and agreed with staff’s views

on the need to strengthen the banking sector, albeit with more focus on expanding banking services.

C. Public Enterprise Reform

25. Progress has been made in enhancing the governance of public enterprises, but they

remain broadly inefficient. Staff welcomes the improved financial reporting, enforcement of the

Public Enterprise Act, and progress made in merging and privatization efforts. Nonetheless, given

their responsibilities to implement social policies, the poorly managed public enterprises are far

from operating on a commercial basis and are mostly making losses despite receiving large

government subsidies. The situation of the Tuvalu Electricity Corporation (TEC) is particularly

worrisome as fuel grants by development partners are to be phased out by end-2014, which would

add to fiscal burdens in subsidizing this corporation and make Tuvalu increasingly susceptible to

fluctuating oil prices in the global market. A recent review conducted by a third party suggests that

tariff adjustments may be inevitable to make the TEC financially viable.

26. A reform plan is needed to put public enterprises on a sustainable footing. The reform

package should aim to enhance the enterprises’ commercial orientation and financial soundness. In

particular, there is a need to clearly define and cost their social responsibilities, which, together with

strengthened accounting and auditing practices, would enhance their transparency and

accountability. With respect to the TEC, electricity tariff rates should be reviewed periodically and

allowed to adjust to appropriately reflect operational cost and fuel price movements, and

government social policies should be directed at protecting the most affected poor.


27. The authorities are committed to advancing public enterprise reform with assistance by

development partners. They are working with the Asian Development Bank on public enterprise

reform through privatization and merging, and are seeking additional technical assistance in

reviewing the operation of the Telecommunication Corporation.

D. Promoting Inclusive Growth

28. The reform momentum should continue with a focus on promoting macroeconomic

stability and growth. The completion of the PRM I and II is commendable. Continued reform via

the initiation of PRM III is important and should focus on strengthening the fiscal framework and

addressing structural weaknesses, notably in the banking and public enterprise sectors. Rebalancing

resources toward basic and vocational education, improving gender equality in accessing training

opportunities, and enhancing infrastructure would help deliver better development outcomes and

TUVALU


strengthen competitiveness. Greater efforts are also needed to foster domestic job market and

explore employment opportunities for the labor force abroad, including through the seasonal

worker scheme in other countries of the Pacific region.

Authorities’ views

29. The authorities are committed to continued reforms. Building upon the achievements

made under the first two phases of PRM, the authorities are working closely with development

partners on the design of PRM III, which may be launched in a few months and will continue to

focus on fiscal sustainability and public financial management as well as structural issues to foster

private sector development.

E. Other Issues

30. Article XIV/VIII. At the time of joining the Fund in 2010, Tuvalu availed itself of the

transitory provisions of Article XIV, Section 2. While the exchange control regulations are quite

restrictive and prescribe approval requirements from the NBT or the Finance Minister for most

payments or transfers, staff’s understanding is that in practice, no approval is required and

payments and transfers for current international transactions are administered liberally. Staff

continues to conduct a comprehensive review of the exchange system to assess jurisdictional

implications. Staff has recommended that the regulations be updated in line with current practice so

that Tuvalu can accept the obligations of Article VIII, Sections 2, 3, and 4, although the authorities

have indicated that they have no current plans to do so.

31. Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).

Tuvalu is currently strengthening its anti-money laundering framework, based on the 2006 AML/CFT

law and benefitting from technical assistance. Tuvalu became an observer to the Asia/Pacific Group

on Money Laundering (APG) in 2014.

32. Capacity building in government statistics remains a daunting task. Progress is being

made in a few areas such as budget execution reporting and balance of payments statistics.

However, the statistical office is understaffed, and weaknesses in national accounts statistics impede

economic analysis. Going forward, there is an urgent need to increase resources allocated to

statistical work and to strengthen training and technical assistance provided by development

partners including PFTAC.

STAFF APPRAISAL

33. Tuvalu has made significant strides in implementing reform policies. Tax administration,

particularly the compliance of public enterprises, and public financial management have been

strengthened. Progress has also been made in enhancing the monitoring and auditing of public

enterprises and removing civil servants from Board positions. Nevertheless, important challenges

remain.

TUVALU


34. Now is the time to build on the favorable budget outcome of the last two years to

further enhance fiscal sustainability. With the buildup of fiscal buffers, the budget is in a strong

position to reinforce fiscal soundness. Fiscal consolidation, particularly unwinding the 2014 budget

expansion, is crucial to put the budget on a sustainable footing. Introducing a medium-term fiscal

framework that targets a structural surplus would profoundly strengthen Tuvalu’s capacity to

manage revenue volatility, and creating more savings in the TTF would build resilience against

adverse shocks.

35. There is considerable room to rationalize social spending. It will be prudent to

institutionalize the referral committee and closely scrutinize the medical expenses under the TMTS.

Staff also encourages the authorities to explore alternative health plans with burden sharing by

individuals, for example negotiating health insurance for its citizens, which can be purchased using

citizens’ savings at the Tuvalu National Provident Fund. For the scholarship program, targeting the

total number of students studying abroad instead of new students would make the resource

allocation more predictable and facilitate budget management.

36. There is an urgent need to address the heightened banking risks. The increasing losses

and liquidity pressure experienced by the DBT may lead to a solvency problem. The authorities need

to develop a contingency plan for the bank’s possible failure, most importantly a resolution

framework and an estimate of associated fiscal costs. Meanwhile, measures need to be undertaken

to contain losses incurred by the bank. A complete review of the banking system should be

conducted, and a regulatory framework should be established as soon as feasible.

37. Given the dominance of public enterprises, their financial viability is crucial to the

health of banks and fiscal sustainability. The Public Enterprise Reform and Management Unit

(PERMU), which is supposed to play a critical role in developing a reform package, should be well

staffed. At the current conjuncture, priority should be given to clearly defining public enterprises’

social responsibilities and enhancing their transparency and accountability via strengthened

accounting and auditing practices.

38. Prudent macroeconomic policies and continued structural reforms are essential to

enhancing competitiveness and building resilience. Although there is no sign of significant

overvaluation, Tuvalu’s competitiveness remains weak, as indicated by the falling remittances from

seafarers. In this context, government spending and wage increase should be restrained to reduce

inflationary pressure and real exchange rate appreciation. Over a longer horizon, providing sound

education and vocational training opportunities, for example, by upgrading training programs at the

Tuvalu Maritime Training Institute and allowing access by women, is key to improving employment

and competitiveness. The implementation of the PRM has begun to bear fruit, and reforms in the

next phase should continue to aim at containing fiscal risks, addressing structural weaknesses in

banks and public enterprises, and enhancing the business environment for the private sector.

39. Data shortcomings, particularly in the national accounts, hamper surveillance.

Additional resources need to be allocated to the statistical work necessary for surveillance and

policymaking.

40. Staff recommends that the next Article IV consultation take place on a 24-month cycle.

TUVALU


Box 1. Tuvalu: External Sector and Exchange Rate Assessment1

Tuvalu’s real effective exchange rate (REER) has returned to its historical level. The REER has

depreciated by about 8 percent since its recent peak in early 2013. The real depreciation was mainly

driven by the weakening of the Australia dollar, the

legal currency in Tuvalu. Historically, Tuvalu’s REER

has moved closely with that of Australia, but has been

less appreciated since the global crisis.

There is no sign of significant exchange rate

misalignment, but loose policies could increase

the risk of overvaluation over the medium term.

Benefiting from lower global food and commodity

prices, as well as increased trade diversification and

retail competition, inflation in Tuvalu has been below

trading partners’ inflation. However, the expected sizable increase in public sector wages would boost

domestic demand, widen the trade deficit, and exert upward pressure on inflation and real exchange rate

appreciation.

Reserves appear sufficient, but would decline in the medium term.2 The significant increase in the

CIF as a result of fiscal surplus in 2012 and 2013 is estimated to push reserves up to around nine months

of imports. In the medium term, however, the fiscal

balance is expected to move into a widening deficit

on the back of stagnated fishing license fees and a

loose control on expenditure, which will cause the CIF

to be fully depleted by 2020 and a rise of imports. As

a consequence, import cover will decline to

five months. Although the reserve cover appears

sufficient by traditional cover, an estimate based on

risk metrics suggests it should be kept at above seven

months of imports.

Tuvalu’s competitiveness remains weak. Remoteness causes high transportation costs and isolation,

and the lack of scale increases transaction cost. Moreover, insufficient human capital impedes Tuvaluans

to explore overseas job opportunities, with declining remittances pointing to structural weaknesses. In

this connection, improving the business climate and taking an innovative approach to exploring growth

opportunities, including strengthening education and training, are particularly important in the long run.

__________________________________ 1 Prepared by Sung Eun Jung.

2 Reserves are defined as the sum of CIF and liquid foreign assets held by the National Bank of Tuvalu.

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140Tuvalu Tuvalu, 10-year average

Australia Other PIC average

Australia, 10-year average

Sources: IMF, INS; IMF, APD-CORE; and IMF staff calculations.

International Comparison: Real Effective

Exchange Rate(Index, 2005 = 100)

0

2

4

6

8

10

12

0

10

20

30

40

50

60

2001 2003 2005 2007 2009 2011 2013

Est.

2015

Proj.

2017

Proj.

2019

Proj.

NBT's foreign assets (left-axis)

CIF (left-axis)

Months of reserve coverage (right-axis) 1/

Source: Tuvalu authorities.

1/ Ratio of international reserves to next year's imports of goods and services, in months.

Tuvalu: International Reserves(In millions of Australian dollars unless otherwise specified)

TUVALU


Figure 1. Tuvalu: The Setting in a Cross-Country Context

Tuvalu is one of the most remote islands in the South Pacific

and among the least populated.

Fishing is the most important industry.

Tuvalu heavily relies on foreign aid. Gross national income is relatively high because of fishing

revenue.

The public sector dominates… …while the private sector remains rudimentary.

Sources: IMF, WEO; IMF, APD-LISC; and IMF staff estimates.

TONFJIVUT

WSMTUV

SLBKIRMHL

FSM

TLS

PLW

6,000

7,000

8,000

9,000

10,000

11,000

GD

P w

eig

hte

d d

ista

nce

(1 thous.) (1 mil.) (1 bil.)

Population

Population versus GDP-Weighted Distance1/

Source: World Bank.

1/ Distance to all countries weighted by GDP.

0

10

20

30

40

50

60

Tuvalu Solomon

Islands

Marshall

Islands

Fiji Vanuatu

Main Exports of Goods and Services, 2012

(In percent of GDP)

Fish

Fish

Logs

Tourism Tourism

0

10

20

30

40

50

60

70

80

Tuva

lu

Mic

ronesi

a

Mars

hall Is

lands

Kir

ibati

Pala

u

So

lom

on Is

lands

Sam

oa

Tim

or-

Lest

e

Vanuatu

To

ng

a

Fiji

External Grants, 2012

(In percent of GDP)

Small states average

PICs

0

2

4

6

8

10

12

14Pala

u

Mald

ives

Tim

or-

Lest

e

To

ng

a

Fiji

Sam

oa

Tuva

lu

Mars

hall

Isla

nds

Vanuatu

Mic

ronesi

a

So

lom

on Is

lands

Kir

ibati

GDP per capita

GNI per capita

GDP per capita, PIC avg.

GNI per capita, PIC avg.

Per Capita Income, 2012

(In thousands of U.S. dollars )

0

10

20

30

40

50

60

70

80

Tuva

lu

Kir

ibati

Mars

hall Is

lands

Mic

ronesi

a

Pala

u

Sam

oa

So

lom

on Is

lands

To

ng

a

Vanuatu Fiji

Current Government Expenditure, 2012

(In percent of GDP)

0

10

20

30

40

50

60

70

80

Tim

or-

Lest

e

Kir

ibati

Mic

ronesi

a

So

lom

on Is

lands

Tuva

lu

To

ng

a

Mars

hall

Isla

nds

Mald

ives

Fiji

Vanuatu

Domestic Credit to Private Sector, 2012

(In percent of GDP)

TUVALU


Figure 2. Tuvalu: Economic Developments

Growth has been generally weak. Inflation has picked up moderately…

…on a weakening Australian dollar. The balance of payments benefited from booming fishing

receipts and large foreign grants.

Official reserves have been built up as a result of a large fiscal

surplus.

The banking sector suffers from large nonperforming loans.

Sources: Tuvalu authorities; TTFAC reports; NBT; DBT; and IMF staff estimates.

-10

-8

-6

-4

-2

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013

Est.

Output gap

Real GDP growth

Historical average (2003-2012)

GDP Growth

(In percent)

-4

-2

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012 2013

Est.

Food contribution to

inflation

Nonfood contribution to

inflation

Inflation (period-average)

Contributions to Inflation

(In annual percentage change)

90

95

100

105

110

115

120

2005 2006 2007 2008 2009 2010 2011 2012 2013

Est.

Nominal effective exchange rate

Real effective exchange rate

Effective Exchange Rates

(2005=100)

-40

-20

0

20

40

60

80

0

15

30

45

60

75

90

2005 2006 2007 2008 2009 2010 2011 2012 2013

Est.

Remittances (LHS; $A million)

Grants (LHS; $A million)

Fishing license fees (LHS; $A million)

Fish exports (LHS; $A million)

Current account balance (RHS; % of GDP)

Main Balance of Payments Receipts

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009 2010 2011 2012 2013

Est.

Gross Official Reserves

(In millions of Australian dollars)

0

2

4

6

8

10

12

14

16

18

Gro

ss

loans

Pro

visi

ons

NPL

Gro

ss

loans

Pro

visi

ons

NPL

2012 2013

Banks' Assets and Liabilities


NBT

DBT

TUVALU


Figure 3. Tuvalu: Fiscal Developments

The budget has continued to run a surplus. Tax revenue increased as a result of improved compliance…

…and non-tax revenue was largely boosted by fishing license

fees.

The Tuvalu Trust Fund has recovered markedly…

…so has the Consolidated Investment Fund. Public debt remained largely stable.

Sources: Tuvalu authorities; TTFAC reports; World Bank; and IMF staff estimates.

2005 2006 2007 2008 2009 2010 2011 2012 2013

-50

-40

-30

-20

-10

0

10

20

30

0

20

40

60

80

100

120

140Capital exp. Current exp.

Grants Revenue

Fiscal balance (RHS)

Fiscal Balance

(In percent of GDP)

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013

Import duty Goods and services

Personal Company

Tax Revenue

(In percent of GDP)

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010 2011 2012 2013

Others

.TV domain license fees

Fishing license fees

Non-tax Revenue

(In percent of GDP)

80

90

100

110

120

130

140

150

2006 2007 2008 2009 2010 2011 2012 2013

TTF market value (closing

position)

TTF maintained value

(threshold)

Tuvalu Trust Fund

(As of September of each year; in millions of Australian dollars)

0

2

4

6

8

10

12

14

16

18

20

2006 2007 2008 2009 2010 2011 2012 2013

CIF stock

TTF transfer to CIF

Consolidated Investment Fund


0

20

40

60

80

100

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012 2013

External debt (LHS; $A million)

Domestic debt (LHS; $A million)

Total debt (RHS; % of GDP)

Public Debt

TUVALU


Table 1. Tuvalu: Selected Social and Economic Indicators, 2010–2015 1/

Population (2013): 10,753 Poverty rate (2010): 26.3 percent

Per capita GDP (2013 est.): US$3,554 Life expectancy (2012): 65 years

Main export: Fish Primary school enrollment (2006): 100 percent

Key export markets: Fiji, Australia, Japan Secondary school enrollment (2001): 79.5 percent

2010 2011 2012 2013 2014 2015

Est.

Real sector

Real GDP growth -2.7 8.5 0.2 1.3 2.2 2.5

Consumer price inflation (period average) -1.9 0.5 1.4 2.0 3.3 3.1

Government finance

Revenue and grants 71.9 69.0 84.3 107.5 116.0 87.6

Revenue 55.5 47.8 56.6 82.9 64.6 65.6

of which: Tax revenue 16.5 16.9 15.0 19.0 15.1 18.0

Fishing license fees 20.6 14.9 21.8 45.4 33.8 32.8

Grants 2/ 16.4 21.2 27.8 24.6 51.4 22.1

Total expenditure 95.7 77.9 75.0 81.1 100.2 92.1

Current expenditure 92.5 76.1 75.0 81.0 100.1 91.9

of which: Wages and salaries 33.8 31.3 31.9 32.2 38.0 36.2

Capital expenditure and net lending 3.2 1.8 0.0 0.2 0.2 0.2

Overall balance -23.8 -8.9 9.3 26.3 15.8 -4.4

Extra budgetary grants 3/ 31.8 21.2 29.3 25.2 25.7 31.4

Tuvalu Trust Fund (stock, $A million) 108 119 131 141 146 145

Consolidated Investment Fund (stock, $A million) 7.2 3.2 4.5 14.5 20.6 18.2

Money and credit

Deposits -8.3 8.6 9.7 29.3 9.5 …

Credit 0.9 15.1 -11.4 -7.7 0.8 …

Lending interest rate (in percent) 4/ 10.6 10.6 10.6 10.6 10.6 …

Balance of payments

Current account balance -4.1 -13.9 9.8 10.5 11.5 -16.3

(In percent of GDP) -11.9 -36.5 25.3 26.4 27.7 -37.2

of which:

Exports of goods 10.9 10.2 19.9 20.5 21.1 21.9

ow/ Fish 10.4 9.4 19.5 20.1 20.7 21.4

Imports of goods -17.3 -17.6 -16.7 -19.1 -22.3 -35.8


Current transfers (net) 15.2 14.3 20.3 18.0 23.1 15.7

ow /Remittances 4.3 4.4 3.7 3.8 4.0 4.1

Capital and financial account balance 10.0 12.3 0.8 1.2 0.5 13.4

of which: .TV domain license fees 2.0 1.9 3.7 4.4 4.1 4.1

Capital transfers (net) 7.5 12.3 4.7 5.1 5.8 9.1

Gross official reserves 5/ 26.6 24.1 27.5 36.5 48.5 45.6

(In months of next year's imports) 6.1 6.6 6.6 7.8 7.9 7.9

Debt indicators

Gross public debt 55.6 45.3 43.0 41.1 56.9 48.6

External 50.6 40.7 36.4 35.3 52.0 44.6

Domestic 5.1 4.6 6.7 5.8 4.9 4.1

Exchange rates

Australian dollars per U.S. dollar (period average) 1.1 1.0 1.0 1.0 … …

Nominal effective exchange rate (2005=100) 111.2 119.1 122.7 123.7 … …

Real effective exchange rate (2005=100) 108.3 111.0 112.4 110.6 … …

Nominal GDP (In millions of Australian dollars) 34.7 38.1 38.5 39.7 41.7 43.8

Sources: Tuvalu authorities; PFTAC; SPC; ADB; World Bank; and IMF staff estimates and projections.

1/ Tuvalu uses the Australian dollar as its currency. It has no central bank.

2/ Includes transfer from the Tuvalu Trust Fund to the Consolidated Investment Fund.

3/ Estimated by staff based on balance of payments and fiscal data.

4/ Average of personal, business, overdraft, and housing loans.

5/ Defined as the sum of foreign assets of the National Bank of Tuvalu, the Consolidated Investment Fund, and SDR holdings.

(In percent of GDP, unless otherwise indicated)

Proj.

(In millions of Australian dollars, unless otherwise indicated)

(Percent change, unless otherwise indicated)

(Percent change)

(In percent of GDP)

TUVALU


Table 2. Tuvalu: Illustrative Medium-Term Baseline Scenario, 2010–2019

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Est.

Growth and inflation

Real GDP growth -2.7 8.5 0.2 1.3 2.2 2.5 2.5 1.9 2.0 1.9

CPI inflation (period average) -1.9 0.5 1.4 2.0 3.3 3.1 3.0 2.9 2.8 2.8

Fiscal accounts

Total revenue and grants 71.9 69.0 84.3 107.5 116.0 87.6 82.4 76.3 74.0 72.2

Revenue 55.5 47.8 56.6 82.9 64.6 65.6 59.9 59.0 57.3 56.0

Grants 16.4 21.2 27.8 24.6 51.4 22.1 22.5 17.3 16.8 16.3

Total expenditure and net lending 95.7 77.9 75.0 81.1 100.2 92.1 87.9 84.0 80.2 77.4

Overall balance (including grants) -23.8 -8.9 9.3 26.3 15.8 -4.4 -5.5 -7.8 -6.1 -5.1

Balance of payments

Current account -4.1 -13.9 9.8 10.5 11.5 -16.3 -10.5 -8.9 -4.6 -5.6

(In percent of GDP) -11.9 -36.5 25.3 26.4 27.7 -37.2 -23.0 -18.7 -9.2 -10.9

of which:

Exports 10.9 10.2 19.9 20.5 21.1 21.9 22.6 23.4 24.3 25.1

(In percent of GDP) 31.5 26.7 51.7 51.7 50.7 50.0 49.3 49.0 48.8 48.7

Imports -17.3 -17.6 -16.7 -19.1 -22.3 -35.8 -28.5 -27.1 -25.9 -26.3

(In percent of GDP) 49.9 46.3 43.3 48.2 53.4 81.8 62.1 56.7 52.1 51.1

Capital and financial account 10.0 12.3 0.8 1.2 0.5 13.4 6.0 2.9 0.2 0.5

of which: Capital transfers 7.5 12.3 4.7 5.1 5.8 9.1 11.3 8.6 6.1 6.4

.TV domain license fees 2.1 2.4 3.7 4.4 4.1 4.1 4.1 4.2 4.2 4.2

Memorandum items

Gross external public debt (percent of GDP) 50.6 40.7 36.4 35.3 52.0 44.6 37.9 32.1 25.5 20.3

External debt service ratio 1/ 7.8 19.4 11.2 11.6 12.8 13.2 12.5 10.7 11.7 9.4

Gross official reserves (millions of U.S. dollars) 26.6 24.1 27.5 36.5 48.5 45.6 41.0 35.0 30.6 25.5

(In months of next year's imports) 6.1 6.6 6.6 7.8 7.9 7.9 7.5 7.0 5.9 4.8

Tuvalu Trust Fund (stock, $A million) 108.0 118.7 130.6 140.6 146.4 145.5 149.1 152.8 156.6 160.6

Consolidated Investment Fund (stock, $A million) 7.2 3.2 4.5 14.5 20.6 18.2 15.2 11.1 7.6 4.5

Sources: Data provided by the Tuvalu authorities and IMF staff estimates and projections.

1/ In percent of exports of goods and services.


(In percent of GDP)

Projections

(Percent change)

TUVALU


Table 3. Tuvalu: Summary Operations of the General Government, 2010–15 (GFS 1986)

2015

2010 2011 2012 2013 Budget Proj. Proj.

Total revenue and grants 24.9 26.3 32.5 42.7 52.0 48.3 38.4

Revenue 19.3 18.2 21.8 32.9 31.0 26.9 28.7

Tax revenue 5.7 6.4 5.8 7.5 7.9 6.3 7.9

Personal income tax 2.0 2.1 2.2 1.5 1.8 1.6 1.6

Corporate income tax 1.2 1.6 1.0 3.0 2.8 1.5 1.6

Consumption & sales tax 0.1 0.1 0.6 1.2 1.2 1.3 1.9

Excise and others 0.8 0.8 0.8 0.7 0.8 0.7 0.8

Import duty 1.7 1.9 1.2 1.1 1.3 1.2 2.0

Nontax revenue 13.6 11.8 16.0 25.4 23.1 20.6 20.8

of which: Fishing license fees 7.2 5.7 8.4 18.0 14.0 14.1 14.3

Interest and dividends 1.9 1.5 0.9 0.2 0.7 1.3 1.3

.TV license fees 2.0 1.9 3.7 4.4 4.1 4.1 4.1

Grants 1/ 5.7 8.1 10.7 9.8 21.0 21.4 9.7

Total expenditure and net lending 33.2 29.7 28.9 32.2 38.7 41.8 40.3

Current expenditure 32.1 29.0 28.9 32.1 38.7 41.7 40.2

of which: Wages and salaries 11.7 11.9 12.3 12.8 15.9 15.9 15.9

TMTS 2.2 2.1 2.3 2.6 2.3 2.8 3.0

Scholarship programs … … 1.8 1.8 2.3 2.3 2.3

Capital expenditure and net lending 1.1 0.7 0.0 0.1 0.0 0.1 0.1

Capital expenditure 1.1 0.7 0.0 0.1 0.0 0.1 0.1

Net lending 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance (incl. grants) -8.3 -3.4 3.6 10.5 13.2 6.6 -1.9

Overall balance (excl. grants) -13.9 -11.5 -7.1 0.7 -7.8 -14.8 -11.6

Structural balance 2/ -9.4 -2.3 3.8 2.6 … 3.5 -4.6

Financing 8.3 3.4 -3.6 -10.5 -13.2 -6.6 1.9

Foreign (net) -0.8 -0.2 -0.1 -0.4 -0.4 -0.4 -0.4

Domestic (net) -0.1 0.0 0.0 0.0 0.0 0.0 0.0

CIF (net, -=increase) 9.2 3.6 -3.5 -10.0 -12.8 -6.1 2.4


Revenue 55.5 47.8 56.6 82.9 74.3 64.6 65.6

Tax revenue 16.5 16.9 15.0 19.0 18.9 15.1 18.0

Nontax revenue 39.1 30.9 41.5 63.9 55.3 49.5 47.6



.TV license fees 5.8 4.9 9.6 11.0 9.7 9.7 9.3

Grants 1/ 16.4 21.2 27.8 24.6 50.4 51.4 22.1

Total expenditure and net lending 95.7 77.9 75.0 81.1 93.0 100.2 92.1

Current expenditure 92.5 76.1 75.0 81.0 92.9 100.1 91.9

of which: Wages and salaries 33.8 31.3 31.9 32.2 38.0 38.0 36.2

TMTS 6.4 5.6 6.1 6.5 5.5 6.8 6.9

Scholarship programs … … 4.7 4.5 5.6 5.6 5.3

Capital expenditure and net lending 3.2 1.8 0.0 0.2 0.1 0.2 0.2

Capital expenditure 3.2 1.8 0.0 0.2 0.1 0.2 0.2

Net lending 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance (incl. grants) -23.8 -8.9 9.3 26.3 31.7 15.8 -4.4

Overall balance (excl. grants) -40.2 -30.1 -18.4 1.8 -18.7 -35.6 -26.5

Structural balance 2/ -27.1 -6.1 9.8 6.4 … 8.3 -10.5

Financing 23.8 8.9 -9.3 -26.3 -31.6 -15.8 4.4

Foreign (net) -2.4 -0.5 -0.1 -1.0 -1.0 -1.0 -0.9

Domestic (net) -0.3 -0.1 0.0 -0.1 0.0 -0.1 -0.1

CIF (net, -=increase) 26.4 9.4 -9.2 -25.3 -30.7 -14.7 5.5

Memorandum items:

Extra budgetary grants 3/ 31.8 21.2 29.3 25.2 … 25.7 31.4

Public debt (in percent of GDP) 55.6 45.3 43.0 41.1 … 56.9 48.6

Stock of CIF ($A million) 7.2 3.2 4.5 14.5 20.6 20.6 18.2

Nominal GDP ($A million) 34.7 38.1 38.5 39.7 41.7 41.7 43.8

Sources: Tuvalu authorities; and IMF staff estimates and projections.


2/ Defined as the overall balance minus deviation from a normal level of fishing license fees, calculated on the basis of backward and forward averages.



(In percent of GDP)

2014

TUVALU


Table 4. Tuvalu: Summary Operations of the General Government, 2010–15 (GFS 2001)

2015

2010 2011 2012 2013 Budget Proj. Proj.


Revenue 19.3 18.2 21.8 32.9 31.0 26.9 28.7

Tax revenue 5.7 6.4 5.8 7.5 7.9 6.3 7.9

Nontax revenue 13.6 11.8 16.0 25.4 23.1 20.6 20.8



.TV license fees 2.0 1.9 3.7 4.4 4.1 4.1 4.1

Grants 1/ 5.7 8.1 10.7 9.8 21.0 21.4 9.7

Expenditure 33.2 29.7 28.9 32.2 38.7 41.8 40.3

Expense 32.1 29.0 28.9 32.1 38.7 41.7 40.2

Wages and salaries 11.7 11.9 12.3 12.8 15.9 15.9 15.9

Purchase of goods and services 8.0 7.5 7.7 8.5 9.8 11.6 9.2

Transfers 1/ 5.2 4.5 6.3 7.9 8.3 9.6 10.7

Interest payments 0.3 0.3 0.1 0.1 0.1 0.1 0.2

Other expense 6.8 4.7 2.5 3.0 4.5 4.5 4.2

Net acquisition of nonfinancial assets 1.1 0.7 0.0 0.1 0.0 0.1 0.1

Gross operating balance -7.1 -2.7 3.6 10.5 13.3 6.6 -1.9

Net lending / borrowing (overall balance) -8.3 -3.4 3.6 10.5 13.2 6.6 -1.9

Net financial transactions 8.3 3.4 -3.6 -10.5 -13.2 -6.6 1.9

Net acquisition of financial assets 9.2 3.6 -3.5 -10.0 -12.8 -6.1 2.4

Domestic 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Foreign 9.2 3.6 -3.5 -10.0 -12.8 -6.1 2.4

Net incurrence of liabilities -0.9 -0.2 -0.1 -0.4 -0.4 -0.5 -0.5

Domestic -0.1 0.0 0.0 0.0 0.0 0.0 0.0

Foreign -0.8 -0.2 -0.1 -0.4 -0.4 -0.4 -0.4


Revenue 55.5 47.8 56.6 82.9 74.3 64.6 65.6

Tax revenue 16.5 16.9 15.0 19.0 18.9 15.1 18.0

Nontax revenue 39.1 30.9 41.5 63.9 55.3 49.5 47.6



.TV license fees 5.8 4.9 9.6 11.0 9.7 9.7 9.3

Grants 1/ 16.4 21.2 27.8 24.6 50.4 51.4 22.1

Expenditure 95.7 77.9 75.0 81.1 93.0 100.2 92.1

Expense 92.5 76.1 75.0 81.0 92.9 100.1 91.9

Wages and salaries 33.8 31.3 31.9 32.2 38.0 38.0 36.2

Purchase of goods and services 23.2 19.8 20.1 21.3 23.6 27.9 21.0

Transfers 1/ 15.0 11.7 16.3 19.9 20.0 23.0 24.5

Interest payments 0.8 0.8 0.3 0.2 0.3 0.3 0.5

Other expense 19.7 12.5 6.4 7.4 10.9 10.9 9.7

Net acquisition of nonfinancial assets 3.2 1.8 0.0 0.2 0.1 0.2 0.2

Gross operating balance -20.6 -7.1 9.4 26.5 31.8 15.9 -4.3

Net lending / borrowing (overall balance) -23.8 -8.9 9.3 26.3 31.7 15.8 -4.4

Net financial transactions 23.8 8.9 -9.3 -26.3 -31.6 -15.8 4.4

Net acquisition of financial assets 26.4 9.4 -9.2 -25.3 -30.7 -14.7 5.5

Domestic 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Foreign 26.4 9.4 -9.2 -25.3 -30.7 -14.7 5.5

Net incurrence of liabilities -2.7 -0.5 -0.2 -1.1 -1.0 -1.1 -1.0

Domestic -0.3 -0.1 0.0 -0.1 0.0 -0.1 -0.1

Foreign -2.4 -0.5 -0.1 -1.0 -1.0 -1.0 -0.9

Memorandum items:

Extra budgetary grants 2/ 31.8 21.2 29.3 25.2 … 25.7 31.4

Public debt (in percent of GDP) 55.6 45.3 43.0 41.1 … 56.9 48.6

Stock of CIF ($A million) 7.2 3.2 4.5 14.5 20.6 20.6 18.2

Nominal GDP ($A million) 34.7 38.1 38.5 39.7 41.7 41.7 43.8

Sources: Tuvalu authorities; PFTAC; and IMF staff estimates and projections.

1/ Includes medical treatment scheme and scholarships, as well as Community Service Obligations (CSO).


2014


(In percent of GDP)

TUVALU


Table 5. Tuvalu: Balance of Payments, 2010–19

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Est.

Current account balance -4.1 -13.9 9.8 10.5 11.5 -16.3 -10.5 -8.9 -4.6 -5.6

Trade -6.4 -7.4 3.2 1.4 -1.1 -13.9 -5.9 -3.7 -1.6 -1.2

Exports, f.o.b. 10.9 10.2 19.9 20.5 21.1 21.9 22.6 23.4 24.3 25.1

of which: Fish 10.4 9.4 19.5 20.1 20.7 21.4 22.1 22.9 23.7 24.5

Imports, f.o.b. -17.3 -17.6 -16.7 -19.1 -22.3 -35.8 -28.5 -27.1 -25.9 -26.3

Services -24.0 -30.2 -23.1 -26.6 -29.5 -32.8 -35.2 -33.6 -28.6 -30.3

Credit 4.4 4.2 4.3 4.4 4.6 4.9 5.1 5.3 5.5 5.7

Debit -28.4 -34.4 -27.4 -31.0 -34.1 -37.7 -40.3 -38.9 -34.1 -36.0

Net income 11.0 9.4 9.4 17.6 19.0 14.7 14.4 14.3 14.3 14.3

Credit 12.7 10.6 12.4 22.4 24.0 20.0 19.9 20.1 20.3 20.5

Debit -1.7 -1.2 -3.1 -4.8 -5.0 -5.3 -5.5 -5.8 -6.0 -6.2

Net transfers 15.2 14.3 20.3 18.0 23.1 15.7 16.2 14.0 11.4 11.7

Credit 17.4 16.7 22.4 20.4 25.5 18.2 18.9 16.8 14.3 14.7

Debit -2.2 -2.4 -2.2 -2.3 -2.4 -2.6 -2.7 -2.8 -2.9 -3.0

Capital and financial account 10.0 12.3 0.8 1.2 0.5 13.4 6.0 2.9 0.2 0.5

Capital account 9.6 14.7 8.4 9.5 9.8 13.2 15.4 12.8 10.3 10.6

of which: Capital tranfers 7.5 12.3 4.7 5.1 5.8 9.1 11.3 8.6 6.1 6.4

.TV domain license fees 2.0 1.9 3.7 4.4 4.1 4.1 4.1 4.2 4.2 4.2

Financial account 0.4 -2.3 -7.6 -8.3 -9.3 0.2 -9.5 -9.9 -10.1 -10.1

Direct investment (net) 0.6 -0.1 1.6 0.7 0.7 0.8 0.8 0.9 0.9 0.9

Portfolio investment (net) -1.9 0.0 -1.4 -1.4 -1.5 -1.6 -1.6 -1.7 -1.8 -1.8

Other (net) 2/ 1.7 -2.3 -7.9 -7.6 -8.6 1.0 -8.7 -9.0 -9.2 -9.2

Errors and omissions -9.1 -0.1 -8.7 -2.7 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance -3.3 -1.7 1.9 9.0 12.0 -2.9 -4.6 -6.0 -4.4 -5.1

Financing

Change in official reserves (-=increase in reserves) 3.3 1.7 -1.9 -9.0 -12.0 2.9 4.6 6.0 4.4 5.1

Memorandum items:

Current account balance (percent of GDP) -11.9 -36.5 25.3 26.4 27.7 -37.2 -23.0 -18.7 -9.2 -10.9

excluding official grants (percent of GDP) -58.8 -77.5 -30.7 -22.1 -30.9 -76.1 -61.3 -51.1 -35.2 -36.6

Gross official reserves 1/ 26.6 24.1 27.5 36.5 48.5 45.6 41.0 35.0 30.6 25.5

(in months of imports of goods and services) 6.1 6.6 6.6 7.8 7.9 7.9 7.5 7.0 5.9 4.8

Sources: Tuvalu authorities; PFTAC; and IMF staff estimates and projections.

1/ Defined as the sum of liquid assets of the National Bank of Tuvalu, the Consolidated Investment Fund, and SDR holdings.

2/ Includes financial transactions related to the joint venture company, Tuvalu Tuna FH Co.

Projections


TUVALU


Table 6. Tuvalu: Assets and Liabilities of the Banking Sector, 2007–13

2007 2008 2009 2010 2011 2012 2013

Est.

Assets 38.4 46.0 41.4 41.1 42.8 44.3 51.3

Cash 1.1 1.1 1.5 1.2 1.6 2.3 1.7

Deposits 10.2 12.8 13.8 14.9 16.7 18.0 20.0

Loans and advances 1/ 23.7 27.0 19.8 20.7 20.8 19.5 18.1

of which: Government loans 4.9 3.6 1.7 2.1 0.3 0.3 0.0

Claims on other banks 0.6 2.2 1.1 1.6 1.0 1.8 8.6

Fixed assets 0.5 0.5 0.5 0.4 0.4 0.4 0.4

Other assets 2.1 2.4 4.7 2.4 2.3 2.4 2.4

Liabilities 25.4 31.0 24.8 21.7 23.5 25.7 33.0

Deposits 21.4 24.1 22.3 20.4 22.2 24.3 31.5

of which: Government deposits 4.3 3.4 2.6 3.9 3.3 3.7 9.3

Demand deposits 7.1 9.7 7.9 7.6 7.6 10.2 18.3

Securities … … … … 0.1 0.1 0.3

Liabilities to other banks 2/ 1.4 2.3 1.0 0.7 0.6 0.5 0.5

Other liabilities 2.6 4.6 1.6 0.6 0.6 0.7 0.8

Capital 13.0 15.0 16.6 19.4 19.2 18.6 18.2

of which: Paid-up capital 3.4 3.7 4.0 4.6 4.7 4.7 4.7

Retained earnings 2.3 3.1 3.9 5.7 5.1 4.5 4.4

Provision for credit impairment 7.3 8.2 8.6 9.1 9.5 9.4 9.1

Sources: National Bank of Tuvalu; and Development Bank of Tuvalu.

1/ Gross loans and advances.

2/ Development Bank of Tuvalu's loans from the European Investment Bank.


TUVALU


Appendix I. Tuvalu: Risk Assessment Matrix 1/

Sources of Risks Likelihood Potential Impact Recommendation

Surges in global financial

market volatility

H. High. Elevated market volatilities will

feed through to the market value of

TTF that is primarily invested in

Australia, making TTF’s transfers to

the budget more uncertain.

Make TTF a rainy day fund, save most

if not all investment returns, and

smooth TTF transfers to the budget by

targeting a longer-horizon benchmark.

Protracted period of

slower growth in

advanced and emerging

economies

H. Medium. Slower growth and

reduced demand in the Pacific

region would cause remittances by

seafarers and seasonal workers to

fall. But meanwhile, a weakening

Australian dollar would help

improve Tuvalu’s competitiveness.

Develop human capital to improve

competitiveness

Foster domestic business climate to

improve employment

Take an innovative approach to

explore foreign employment

opportunities

Growth slowdown in

China

M. Medium. Slower growth and

reduced demand in the Pacific

region would cause remittances by

seafarers and seasonal workers to

fall. But meanwhile, a weakening

Australian dollar would help

improve Tuvalu’s competitiveness

Develop human capital to improve

competitiveness

Foster domestic business climate to

improve employment

Take an innovative approach to

explore foreign employment

opportunities

Climate change

M-H. High. The occurrence of extreme

weather conditions could cause

fluctuation in fishing revenues and

large economic loss, while tuna

stock tends to relocate and decline

on variability of the ocean’s

conditions over the long run.

Strengthen fiscal buffers (see above)

Build adaptive capacity to increase

resilience, with assistance by

development partners

Weak fiscal policy and

lower foreign aid

M-H. High. Fiscal buffers could be fully

depleted, making the economy

highly vulnerable to adverse shocks.

Establish a transparent fiscal

framework that addresses pro-cyclicality

and saves for rainy days

Conduct fiscal consolidation and build

fiscal buffers

Closely engage with development

partners to mobilize foreign aid.

Poor governance of

public enterprises and

banks

H. High. The weaknesses in public

enterprises and banks pose

challenges to growth and stability.

Adopt public enterprise reforms to

enhance transparency and

accountability

Elevated banking

risks/Insolvency of DBT

H. High. Large NPLs impede lending,

and pose substantial contingent

liabilities to the budget. A possible

insolvency of the DBT could cause

spillover risks to the banking system

and large fiscal cost.

Establish a regulatory framework for

banks

Assess fiscal cost of bank

restructuring based on prudential

standards

Develop a bank resolution framework

1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to

materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

TUVALU


Appendix II. Tuvalu—Policy Reform Matrix—Policies and Progress of Implementation

Policies Objectives Implementation as of 2014Q2

Produce annual reports for the

Education and Health programs,

and reduce cost of the overseas

medical treatment scheme

Improve transparency and

accountability of social

programs, and contain their

costs

A few reports have been produced, but

others remain to be completed and the

regularity of reporting remains to be

improved. Some measures, albeit

insufficient, have been introduced to

reduce the cost of the overseas medical

treatment scheme.

Conduct annual reporting and

auditing for public enterprises

Strengthen governance and

transparency of public

enterprises

All public enterprises except the National

Fishing Corporation of Tuvalu have been

audited in 2012. The 2013 audit is in

progress.

Remove public servants from

Public Enterprise Boards

Reduce government

intervention in Public

Enterprises

The government requested voluntary

resignation of public servants from Board

positions, and all public servant Board

members have now resigned.

Develop a budget manual Enhance public financial

management

The manual was drafted with the

assistance of external advisors, and has

been approved by the Cabinet. The

Ministry of Finance and Economic

Development is organizing training

sessions for budget staff.

Increase VAT compliance to 75%

of registered entities, including

100% of Public Enterprises

Strengthen tax administration This has been achieved.

Conduct tax audit training and

undertake at least 2 audits of

large taxpayers

Strengthen tax administration The external tax advisor has conducted

intensive tax audit training for IRD staff.

So far IRD has made more than two

audits of large taxpayers

Increase VAT rate to 7% in 2013 Increase tax revenue and

move toward common

practices of other countries

The Regulation validating a 7% VAT rate

has been passed and implemented.

TUVALU


Appendix III. Tuvalu—Climate Change—The Economic Impact on Pacific Islands Economies1

Climate change poses substantial challenges to small island economies in the Pacific.2

Estimates suggest that sea levels in the Pacific could rise by as much as 1.2 meters to 1.7 meters

before 2100, which would lead to significant declines in land area. Moreover, El Niño and La Niña

events could also increase by over 40 percent in

the Pacific, leading to a rise in the frequency and

intensity of extreme weather events. This will

particularly threaten the existence of Pacific island

countries, where a concentration of population,

socioeconomic activities, and major infrastructure

along the low-lying coastal areas make them

highly vulnerable to rising sea levels and extreme

weather events.3 In this context, Tuvalu, one of the

lowest countries in the world with the highest

point only 4.6 meters above sea level, is

particularly susceptible.

Estimates suggest climate change could inflict

losses to the Pacific region amounting to 2.2 to

3.5 percent of GDP per year. Given a 2-4 C° temperature increase, projected economic losses

amount to US$1 billion in damages to water resources.4 Agriculture could account for one-third to

one-half of total economic losses caused by climate change. These effects would be acutely felt in

Tuvalu where more than 60 percent of the total land area is devoted to agricultural production.

Fisheries will also be affected by more acidic oceans and degraded fish habitats, which will lower the

yields of some species and cause the location of

fish resources to shift.

Building capacity against climate change

would entail substantial investment. Currently,

the Pacific island countries are far from being

resilient to climate change, and substantial

investments are needed to enhance the capacity

to offset the impact of climate change. Building

adaptive capacity such as climate-proofing critical

infrastructure, enhancing existing early-warning

systems for coastal inundation, and developing

plans in coastal management—including coral-

reef conservation and protection—are necessary

to address a wide range of uncertain climate

outcomes. The funding cost could average from 1.5 to 2.5 percent of GDP per year.

1 Prepared by Inderjit Sian.

2 The Economics of Climate Change in the Pacific, 2013, Asian Development Bank,

http://www.adb.org/publications/economics-climate-change-pacific. 3 Climate Change – Small Island Developing States, 2005, UNFCC.

4 Climate Change Impacts—Pacific Islands”, the Global Mechanism and IFAD

0 20 40 60 80

Papua New Guinea

Solomon Islands

Palau

Samoa

Cook islands

Vanuatu

Nauru

Fiji

Timor-Leste

Micronesia

Kiribati

Tonga

Tuvalu

Marshall Islands

Area of Land Devoted to Agriculture, 2011

(Percentage of total area)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Estimates of Sea-Level Rise By 2100 Relative to 2010(In meters)

http://www.adb.org/publications/economics-climate-change-pacific

TUVALU


Appendix IV. Tuvalu—Pacific Islands—Are Fishing Resources Renewable?1

The Pacific islands region is the home to some of the last healthy tuna populations in the

world. The Western and Central Pacific Ocean (WCPO) contains the world’s largest stock of tuna

and accounts for more than half of the global tuna catch. The value of tuna catch in this region has

almost doubled since 2010, reaching around US$2.8 billion.

Overfishing constitutes a key challenge to tuna population. The stock of tuna is at a historical

low and may not be renewable under intense

pressure from international fishing fleets. Since

the 1960s, the global catch has increased

from 20,000 tons per year to 4 million tons per year,

and the tuna population plummeted. Studies

estimate that the population of one key species, the

Pacific bluefin, has dropped by 96 percent in recent

decades because of overfishing, and the catch of

bigeye tuna, another popular species in the market,

needs to be reduced by at least 32 percent from

the 2006-09 levels to ensure long-term

sustainability.2,3

Climate change is expected to reduce the suitability of tuna spawning and forage habitats. In

the long run, rising ocean temperatures will reduce primary and secondary production in the sea,

which, together with weakening currents and nutrient transport, will reduce the population of tuna.

In the short run, concentration areas of tuna tend to move—countries in the central Pacific, such as

Kiribati and Tuvalu, experience higher catches during El Niño years, while countries in the western

Pacific, such as Papua New Guinea and Solomon Islands enjoy higher catches during La Niña years.

These movements will cause year-to-year fluctuations in the tuna catch by individual countries.

Restricting overfishing is a challenging task. The Vessel Day Scheme has vastly boosted fishing

revenues in recent years, but its impact on fish resources has been unclear. Although the Pacific

island countries attempt to preserve tuna resources by setting limits on the number of vessel days,

the number of registered fishing vessels has continued to rise, and fishing technologies have

become increasingly efficient and perhaps potentially harmful—the most popular fishing method in

the region called purse seine fishing has caused a significant rise of juvenile catches.

1 Prepared by Sung Eun Jung.

2 Harvey, Fiona (January 2013), "Overfishing causes Pacific bluefin tuna numbers to drop 96%". The Guardian (London: GMG). ISSN

0261-3077. OCLC 60623878. 3 Policy Brief 14/2012, Secretariat of the Pacific Community

http://www.spc.int/coastfish/en/publications/brochures/policy-briefs.html

0

500

1,000

1,500

2,000

2,500

3,000

0

500

1,000

1,500

2,000

2,500

3,000

1998 2000 2002 2004 2006 2008 2010 2012

By non-national fleets

By national fleets

Value of Tuna Catch(In millions of US dollars)

Source: Secretariat of the Pacific Community.

http://www.guardian.co.uk/environment/2013/jan/09/overfishing-pacific-bluefin-tuna

http://en.wikipedia.org/wiki/The_Guardian

http://en.wikipedia.org/wiki/London,_England

http://en.wikipedia.org/wiki/Guardian_Media_Group

http://en.wikipedia.org/wiki/International_Standard_Serial_Number

http://www.worldcat.org/issn/0261-3077

http://en.wikipedia.org/wiki/OCLC

http://www.worldcat.org/oclc/60623878

http://www.spc.int/coastfish/en/publications/brochures/policy-briefs.html

TUVALU


Appendix V. Tuvalu—Seafarers’ Employment and Remittances in Kiribati and Tuvalu1

Seafaring provides an important source of employment and remittances for Kiribati and

Tuvalu, but both employment and remittances associated with this traditional activity have

exhibited clear downward trends in recent years. While remaining sizable, employment fell

sharply during the global financial crisis. As of October 2013, there were about 1,008 Kiribati and

112 Tuvalu seafarers on board, compared to 1,452 and 361 respectively in 2006. Over the period,

seafarer remittances fell by about 4 percent of GDP for Kiribati and 9 percent of GDP for Tuvalu.

In 2012, remittances stood at 5.8 percent of GDP in Kiribati and 10 percent of GDP in Tuvalu. The

depreciation of the U.S. dollar over the past few years has also had a negative impact on the

Australian dollar value of seafarer remittances.

The recovery in world trade from the global financial crisis did not produce a corresponding

recovery in seafarer employment for a number of structural reasons. The shipping industry

serving global trade continues to suffer from low profitability and overcapacity, and increasing

automation of ship operations has reduced the demand for seafarers. At the same time, seafarers

from Kiribati and Tuvalu have become less competitive compared with those from South and

Southeast Asian countries as transportation costs for Kiribati and Tuvalu seafarers traveling to their

destinations have become relatively high.

Insufficient training in some cases impedes seafarer employment. While the Kiribati Marine

Training Center is considered one of the best

vocational training institutes in the region, training

programs provided by the Tuvalu Maritime Training

Institute are generally for traditional merchant

vessels and have become inadequate for ships

equipped with modern technologies. Moreover,

while the close connection with the German

merchant ships has traditionally provided an

important source of employment and income, this

concentration has increasingly aggravated external

shocks to Kiribati and Tuvalu seafarers’ employment

and remittances.

1 Prepared by Xuefei Bai, Sergei Dodzin, and Jiangyan Yu.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0

2

4

6

8

10

12

14

16

18

20

Seafarers Remittances: Kiribati and Tuvalu

Seafarer's Remittance (Tuvalu, million Australia Dollar, LHS)

Seafarer's Remittance (Kiribati, million Australia Dollar, LHS)

Average Remittance Per Seafarer (Tuvalu, US Dollar, RHS)

Average Remittance Per Seafarer (Tuvalu, Australia Dollar, RHS)

Average Remittance Per Seafarer (Kiribati, US Dollar, RHS)

Average Remittance Per Seafarer (Kiribati, Australia Dollar, RHS)

TUVALU


Appendix VI. Tuvalu—Public Enterprises in Tuvalu1

The financial performance of public enterprises remains weak. The audited accounts for 2012

show that most public enterprises reported financial losses and revealed significant vulnerabilities in

their financial position.2 The impediments to public enterprise operations remain the same as those

identified in the 2012 Article IV staff report, namely persistent inefficiencies in management

practices, weak tariff structures, arrears on payments by the government, and limited scope to gain

from economies of scale. As such, losses made by these enterprises—at more than 3 percent of

GDP in the past few years—entail substantial potential liabilities of the government.

An ambitious reform plan was enacted under the 2010 Public Enterprise Act (PEA), but

progress has been slow in most areas. While progress was made in removing civil servants from

Board positions, progress in other areas has been limited. Under the Act, the Public Enterprise

Reform Monitoring Unit (PERMU) was established to monitor enterprises’ compliance with the

legislation, but the unit is effectively not in operation as the Director and supporting positions are

presently vacant. Additionally, while the government compensates public enterprises’ social

services—for instance the provision of electricity and banking services to the outer islands—through

allocations of Community Service Obligations (CSOs), the amounts are determined on the basis of

negotiations between the recipients and the government rather than a clear defining and costing of

social responsibilities assumed by public enterprises.

Certain public enterprises will face additional financial pressures. The recent wage increase for

civil servants has induced public enterprises to raise salaries for their employees by a similar margin,

adding to operational costs. The Tuvalu Electricity Corporation faces substantial challenges as fuel

grants from Japan are to be phased out by end-2014—the corporation would make more losses and

be more susceptible to global oil price movements.3

1 Prepared by Inderjit Sian.

2 The 2013 audited accounts are not available yet.

3 It is estimated that tariff rates at the electricity company need to rise by around 50% for it to be profitable.

Public Enterprises Year Assets (Percent

of GDP)

Solvency

(Profit/Liabilites

in Percent)

National Bank of Tuvalu (NBT) 2012 80 4

Development Bank of Tuvalu (DBT) 2012 6 -55

Tuvalu Telecommunications Corporations (TTC) 2012 6 -9

Vaiaku Lagi Hotel (VHL) 2012 0 -28

Tuvalu Electricity Corporation (TEC) 2012 15 8

Tuvalu Maritime Training Institue (TMTI) 2011 17 -2

Tuvalu Philatelic Bureau 2010 0 -35

National Fishhing Company of Tuvalu (NAFICOT) N.A. N.A. N.A.

TUVALU STAFF REPORT FOR THE 2014 ARTICLE IV

CONSULTATION—INFORMATIONAL ANNEX

Prepared By

Asia and Pacific Department

FUND RELATIONS _______________________________________________________________________ 2

IMF-WORLD BANK COLLABORATION __________________________________________________ 4

RELATIONS WITH THE ASIAN DEVELOPMENT BANK _________________________________ 6

PFTAC COUNTRY STRATEGY 2012–2014 _______________________________________________ 8

STATISTICAL ISSUES ___________________________________________________________________10

CONTENTS

August 5, 2014

TUVALU


FUND RELATIONS

(As of June 30, 2014)

Membership Status: Joined June 24, 2010; Article XIV

General Resource Account: SDR Million % Quota

Quota 1.80 100.00

Fund holdings of currency (Exchange Rate) 1.37 76.00

Reserve Tranche Position 0.43 24.06

SDR Department: SDR Million % Allocation

Net cumulative allocation 1.69 100.00

Holdings 1.26 74.40

Outstanding Purchases and Loans: None

Financial Arrangements: None

Projected Payments to the Fund: None

Exchange Arrangements:

Tuvalu’s legal tender is the Australian dollar. There is no central monetary institution. At the time of

joining the Fund, Tuvalu availed itself of the transitory provisions of Article XIV, Section 2. While the

exchange control regulations are quite restrictive and prescribe approval requirements from the NBT

or the Finance Minister for most payments or transfers, staff’s understanding is that in practice, no

approval is required and payments and transfers for current international transactions are

administered liberally. Staff continues to conduct a comprehensive review of the exchange system to

assess jurisdictional implications. Staff has recommended that the regulations be updated in line

with current practice so that Tuvalu can accept the obligations of Article VIII, Sections 2, 3 and 4,

although the authorities have indicated that they have no current plans to do so.

The NBT is the only bank in Tuvalu handling foreign exchange transactions. The NBT buys and sells

foreign exchange at rates determined daily by the NBT’s board on the basis of rates quoted in the

international markets plus specific spreads dependent on the specific foreign currency.

Article IV Consultation:

The previous Article IV consultation discussions were held in Funafuti in June 2012. The staff report

(IMF Country Report No. 12/259) was discussed by the Executive Board on August 3, 2012.

TUVALU


Technical Assistance:

The Pacific Financial Technical Assistance Centre (PFTAC) has provided assistance on tax policy and

administration (2007, 2008, 2010, and 2014); and financial sector supervision (2008). The Secretariat

of the Pacific Community has provided assistance on national accounts statistics (2010, 2012). The

IMF has provided assistance on balance of payments and government finance statistics under the

JSA Project in the Asia and Pacific Region (2012, 2013, and 2014).

Resident Representative:

A Resident Representative office, covering Pacific islands and based in Fiji, was established in

September 2010.

TUVALU


IMF-WORLD BANK COLLABORATION

The Bank and Fund country teams, currently led by Mr. Robert Utz (Lead Economist, EASPN)

and Mr. Jiangyan Yu (Fund mission chief for Tuvalu), have maintained a close working

relationship and dialogue on macroeconomic and structural issues. Since Tuvalu’s decision to

pursue membership of the Bretton Woods institutions in 2009, the Bank team has joined all IMF

missions to Tuvalu since the country’s membership mission, including Article IV missions.

The teams agree that Tuvalu’s main macroeconomic challenges are to ensure fiscal

sustainability, strengthen public service delivery, and create a more supportive environment

for development. Based on this shared assessment, the teams identified the following structural

reform areas, all of which are also addressed in the authorities’ Policy Reform Matrix (PRM), as

macro-critical:

i. Strengthening public financial management. In the absence of its own currency and

monetary policy, a sustainable fiscal policy is key to maintaining macroeconomic stability.

Rebuilding buffer assets which were nearly exhausted in the aftermath of the global financial crisis is

crucial to ensuring sustainability. Maintaining adequate buffer assets will require a sound fiscal

policy framework including saving of cyclical revenues. Moreover, budget reporting and monitoring

need to be improved and economic and policy analysis capacity should be strengthened to better

inform new spending initiatives.

ii. Reforming public enterprises. The government, with ADB support, has begun a

comprehensive public enterprise reform program to improve current weak performance and

profitability. Ensuring public enterprises are independently and professionally run, and are

transparently subsidized for provision of essential but noneconomic activities will strengthen

Tuvalu’s business climate and lessen the drain on public resources.

iii. Exploring opportunities for poverty reduction, job creation, and private sector development.

Tuvalu’s geographic isolation, small size, and poor land quality have made it challenging to generate

domestic private sector employment. Demand for Tuvaluan seafarers on the international maritime

employment market is declining, due to rising competition from other countries, and existing labor

migration schemes have not been well utilized. Adequate education and training need to be

provided for Tuvaluans to better utilize overseas job opportunities and to reduce rising poverty.

iv. Strengthening public service delivery. The government of Tuvalu in the TKII and the medium

term reform agenda identified improving service delivery in the health and education sectors as key

objectives. Based on analysis from the Health and Education Medium Term Expenditure Framework

and other analytical work, the authorities have begun to consider reforms to ensure appropriate

allocation between primary and tertiary service delivery, and maximizing returns on scare resources.

v. The teams expect to sustain the close cooperation going forward. Table 1 details the

specific activities implemented and planned by the two teams over the period July 2014–October

2016.

TUVALU


Table 1. Tuvalu: Bank and Fund Implemented/Planned Activities in Macro-Critical Areas,

[ July 2014–October 2016]

Products Expected/Actual Delivery Date

World Bank Work

Program

Joint participation in Article IV Mission

Systematic Country Diagnostic

Country Policy Institutional Assessment

Tuvalu Aviation Investment Program

Second Budget Support Operation

Pacific Regional Oceanscape Project

Energy Project

Telecom TA

[Annual/Biennial]

[FY2015]

[Annual]

[FY2016]

[FY2015]

[FY2015]

[FY2015]

[FY2015]

IMF Work Program PFTAC: BOP statistics TA mission

PFTAC: national accounts TA mission

PFTAC: bank supervision TA mission

Staff visit

[FY2015]

[FY2015]

[FY2015]

June 2015

TUVALU


RELATIONS WITH THE ASIAN DEVELOPMENT BANK

Partnerships

The Asian Development Bank (ADB) has partnered with the Government of Tuvalu since 1993. As of

31 December 2013, three loans with a total value of US$7.82 million, two policy-based grants for

US$5.59 million, and over 20 technical assistance projects totaling US$6.51 million have been

approved, largely supporting education and public sector management.

ADB’s approach and operations in Tuvalu are aligned to the National Strategy for Sustainable

Development, Te Kakeega 2005–2015, objectives of good governance and macroeconomic growth

and stability.

ADB, together with development partners, remain committed to supporting government’s roadmap

for improving the management of public resources, exercising prudent public expenditure and fiscal

management, strengthening corporate governance, and delivering better public services to the

people of Tuvalu.

ADB participates as a team member of the International Monetary Fund Article IV Mission to Tuvalu,

and liaises closely with the Pacific Financial Technical Assistance Centre—particularly on

macroeconomic management and fiscal conditions.

ADB observes the biannual meetings of the Tuvalu Trust Fund Board and cooperates with civil

society organizations in Tuvalu to strengthen the effectiveness, quality, and sustainability of its

services.

ADB is also committed to undertaking joint missions with development partners to improve

coordination and lessen demands on country capacity.

ADB Supported Projects and Programs

ADB’s strategic directions in Tuvalu remains focused on strengthening public financial management,

including public expenditure and fiscal management, corporate governance, and public enterprise

reforms.

From November 1999 to July 2001, ADB worked closely with the government to implement the

Island Development Program loan and technical assistance program. This focused on improving

governance and economic management, enhancing employment opportunities through skills

development, and improving services on the outer islands. The loan was closed in 2001 and rated

successful. ADB also completed the upgrade of the Tuvalu Maritime Training Institute in 2010. Rated

partly successful, the new structures and training facilities enable the institute to remain accredited

with the International Maritime Organization, and will improve the education and skills of Tuvaluan

seafarers so that they can compete for jobs overseas.

TUVALU


Tuvalu has benefitted from a number of ADB regional projects in the areas of economic

management, governance, environment, renewable energy, private sector development, and

education. Ongoing support for economic analyses is available under the Pacific Economic

Management technical assistance with revenue and statistics technical support provided by the

Pacific Financial Technical Assistance Centre. Regional cooperation offers many benefits and the

collective efforts towards increased aviation safety and security requirements under the ADB-

financed Pacific Aviation Safety Office and the Pacific Regional Audit Initiative are good examples of

its potential.

Developing effective fiscal management to complement private sector development has been a

long-standing goal of ADB to Tuvalu. The Improved Financial Management Program grant for $3.24

million was approved in December 2008 and disbursed in 2009 and 2011. The second program

grant of $2.35 million, approved in November 2012 and disbursed in March 2013, achieved key

public financial management objectives outlined in government’s policy reform matrix.

ADB’s technical assistance helped build the government’s capacity to meet commitments under

both programs. Overall, the performance of public enterprises has improved, however developing

and implementing a more robust policy reform matrix and building on past successes is important

for sustainable economic growth and more efficient and effective public services for the people of

Tuvalu.

Future Directions

Tuvalu’s growth strategy is set out in the National Strategy for Sustainable Development, Te

Kakeega, 2005–2015. The strategy recognizes that strengthening public sector management and

improving the private sector are key drivers for change in Tuvalu. This is consistent with the focus of

ADB’s Pacific Approach 2010–2014, approved in November 2009, as well as ADB’s country

operations business plan (COBP) 2014–2016 for Tuvalu, approved in July 2013.

ADB’s operational strategy for 2014-2016 focuses on improving public financial management and

supporting the process of public enterprise reform, with specific objectives to improve their

governance, administration, and profitability.

A policy-based grant of US$2.2 million in 2015 and supporting technical assistance of $300,000 per

annum is planned to help Tuvalu build on previous programs and ensure that the reform

momentum created by earlier programs is sustained.1

Tuvalu will continue to benefit from regional projects in the areas of economic management and

governance, climate change, education, and support from the Pacific Infrastructure Advisory Center

in the energy and utilities sectors.

1 As a Category A country, Tuvalu is eligible for grant assistance from the Asian Development Fund (ADF). The country allocation is

indicative and is subject to a revised estimate of ADF commitment authority, country performance assessment outcomes, and the

country’s risk of debt distress.

TUVALU


PFTAC COUNTRY STRATEGY 2012–2014

Background

Tuvalu has faced a difficult macroeconomic environment in recent times which has resulted in

pressures on fiscal sustainability. Growth has remained weak despite improved performance in

the fishing and private retail sectors. Large revenue from fishing licenses, together with substantial

donor financial support, facilitated a sizable budget surplus in 2013 but also an expansionary budget

in 2014. The short-term outlook appears stable on the back of large donor-financed investments

expected in the period ahead, but the balance of risk tilts towards the downside. Vulnerabilities in

the SOE and financial sectors continue to pose challenges to macro stability.

Development partner budget support has enabled operations to continue while the authorities work

with partners to develop a joint policy matrix to underpin future budget support. Tuvalu became an

IMF and World Bank member in 2009.

PFTAC TA has been moderate and concentrated in the revenue and statistics sectors. Recent

PFTAC TA has been focused on assisting the authorities achieve the gains planned from revenue

reforms through on-the-job assistance in revenue administration following the completion of an

ADB project that supported the PFTAC-designed reforms. There has also been significant assistance

in developing national accounts and balance of payments statistics, in part to allow Tuvalu to meet

the requirements of IMF membership. PFTAC provided TA in 2012 to develop a PFM Reform

Roadmap.

Strategy 2012–2014

PFTAC’s TA strategy is guided by the APD regional strategy note and is planned within the results

framework for the current PFTAC funding cycle.1

PFTAC TA aims to support the authorities sustain progress on improving fiscal sustainability.

PFTAC will continue to work closely with the broader development partner group to ensure

coherence and will aim to support implementation of actions in the authorities’ shared policy matrix.

Development of a PFM Roadmap and enhancement of national accounts statistics are expected to

be the main focus.

In the Public Financial Management area, PFTAC provided support in 2012 to develop a PFM

roadmap to prioritize the strengthening of PFM weaknesses identified in the 2011 PEFA (1.2).

Support to implementation of specific elements will also be available, in coordination with other

development partners and in particular the AusAID-supported budget and treasury advisors.

Officials from Tuvalu have regularly attended PFTAC’s PFM workshops, including the annual 2 week

Strategic Development Workshop jointly sponsored by PFTAC and the Australian Department of

Finance at ANU in Canberra. PFTAC would look to assist the authorities implement a follow-up PEFA

assessment, probably in 2015 (1.1).

TUVALU


In the revenue area, the main focus will be continuing support in the enforcement of SOE tax

obligations through an enhanced compliance improvement program. It is anticipated that this

program will roll out to include large corporate and individual business enterprises during 2014/15.

The IT operating system was re-established in 2013/14 after data base issues were resolved and

maintenance and effective use of the system will be an important tool in improving compliance.

PFTAC plans a support Mission in May 2014 with a follow up support mission in early 2015.

In statistics, PFTAC will resume providing regular assistance on national accounts compilation (4.1),

taking over from SPC which has been doing this since 2010. Training will also be provided to

increase capacity in the statistics office so that ultimately broader measures of national income and

saving (4.3) can be regularly produced. PFTAC has been providing support on balance of payments

compilation (4.6, 4.9) but this has been taken over by the JSA Project on the Improvement of

External Sector Statistics in the Asia and Pacific Region.

In financial sector supervision, PFTAC will be available to provide strategic support should the

authorities begin implementing the financial institutions act passed in 2010. Given the lack of in

country capacity, establishing a basic on and off site supervision program (3.1 and 3.4) will require

TA resources well in excess of PFTAC’s availability. As in other sectors though, PFTAC would be able

to provide strategic oversight to the process if other partners were able to provide resources for on

the job support.

No direct macroeconomic support is currently envisaged, with the TTFAC and ADB’s PEM TA

currently taking the lead in these areas.

TUVALU


STATISTICAL ISSUES

(As of July 1, 2014)

I. Assessment of Data Adequacy for Surveillance

General: Data have shortcomings that hamper surveillance. Shortcomings are most serious in the national

accounts and monetary statistics. The Pacific Financial Technical Assistance Centre (PFTAC) and the Statistics

Department (STA) have provided technical assistance (TA) to the Central Statistics Division (CSD) of the Ministry

of Finance to help compiling statistics for surveillance and the authorities’ own policy analysis and formulation.

The CSD will need to train additional staff to improve data provisioning.

National accounts: With PFTAC assistance, the compilation methodology for the national accounts is gradually

improving. Attention needs to be paid to improving source data for national accounts.

Price statistics: The consumer price index (CPI) is the only price index compiled in Tuvalu. The CSD produces a

quarterly CPI, which is timely and of reasonable quality. The CPI weights were revised in 2011, based on

the 2010 Household Income and Expenditure Survey.

Government finance statistics (GFS): The MOF compiles the central government data for budget analysis and

control. However, the classifications of some accounts, particularly on capital spending, need to be improved to

be in line with international standards. GFS data are not reported to STA. The authorities are participating in the

Japan Administered Account for Selected IMF Activities (JSA)-funded three-year regional GFS capacity building

project. It is anticipated that a total of three missions to Tuvalu will be conducted under this project, the first

two of which occurred in April 2012 and April 2013. Staff resource levels continue to be an impediment to an

efficient and effective GFS data compilation.

Monetary and financial statistics: Tuvalu uses the Australian dollar as its legal tender and does not have a

central bank. Monetary and financial statistics are currently not produced in Tuvalu. The National Bank of

Tuvalu and the Development Bank of Tuvalu provided the Article IV mission with their balance sheets, which

were used to produce the monetary data on the two banks.

Balance of payments and International Investment Position (IIP): The IMF has been providing TA to Tuvalu

under the JSA Project on the Improvement of External Sector Statistics (ESS) in the Asia and Pacific Region.

Three TA missions have been conducted since April 2013. Important progress has been made in improving

coverage and classification of the ESS. Moreover, capacity has been developed and the CSD compiler has taken

ownership of most of the compilation process. However, shortcomings remain in the coverage of FDI, exports,

and debt-related transactions and positions. There is also a high risk of sudden disruption of the compilation

process and deterioration of data quality as the CSD has only one ESS compiler, who also compiles other

macroeconomic statistics.

II. Data Standards and Quality

Tuvalu began participating in the General Data

Dissemination System in 2013.

No data ROSC are available.

III. Reporting to STA

Annual balance of payments and IIP statements, both in BPM6 format, were submitted to STA in May 2014 for

the first time (data are currently under review). Other statistics are currently not being reported to STA.

TUVALU


Tuvalu: Table of Common Indicators Required for Surveillance

(As of July 1, 2014)

Date of

Latest

Observation

Date

Received

Frequency

of

Data7

Frequency

of

Reporting7

Frequency of

Publication7

Exchange rates1 7/1/14 7/1/14 D NA NA

International reserve assets and reserve

liabilities of the monetary authorities2

04/2014 05/2014 M I NA

Reserve/base money NA NA NA NA NA

Broad money NA NA NA NA NA

Central bank balance sheet NA NA NA NA NA

Consolidated balance sheet of the banking

system 04/2014 05/2014 M I NA

Interest rates

04/2014 05/2014 M I NA

Consumer price index 03/2014 05/2014 Q Q NA

Revenue, expenditure, balance and composition

of financing3––general government

4 NA NA NA NA NA

Revenue, expenditure, balance and composition

of financing3––central government

04/2014 05/2014 M M M

Stocks of central government and central

government-guaranteed debt5

04/2014 05/2014 A A NA

External current account balance 12/2012 05/2014 A A A

Exports and imports of goods and services 12/2012 05/2014 A A A

GDP/GNP 12/2012 05/2014 A A NA

Gross external debt

12/2013 05/2014 A A NA

International investment position6 12/2012 05/2014 A A A

1Tuvalu uses the Australian dollar as its legal tender.

2 Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should

comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional

values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency

but settled by other means. Tuvalu does not have a monetary authority. Foreign assets of National Bank of Tuvalu

and the Consolidated Investment Fund constitute the official reserves of Tuvalu. 3 Foreign, domestic bank, and domestic nonbank financing.

4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social

security funds) and state and local governments. 5 Including currency and maturity composition.

6 Includes external gross financial asset and liability positions vis-à-vis nonresidents.

7 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

TUVALU STAFF REPORT FOR THE 2014 ARTICLE IV

CONSULTATION—DEBT SUSTAINABILITY ANALYSIS

This year’s Debt Sustainability Analysis (DSA) concludes that Tuvalu is at a high risk of

debt distress, the same risk rating assigned in the previous DSA conducted in 2012. While

a large fiscal surplus was recorded over the last two years, allowing the country to build

up needed fiscal buffers, the increase in expenditures envisaged in the 2014 budget—

financed by a temporary but large increase in foreign grants— implies a significant

increase in the risk to fiscal sustainability. Under the baseline scenario, where the increase

in the spending envelope is not scaled back in line with the unwinding of foreign grants in

a timely manner, the budget would slip into a deficit from 2015 onwards. Although the

PV of debt to GDP ratio would initially fall below the indicative policy threshold as fiscal

buffers are depleted, over the medium term debt would build up again as fiscal buffers are

exhausted, and reach above the indicative threshold in outer years of the projection. This

trajectory underscores why a modest fiscal surplus is needed to lower the risk of debt

distress to moderate levels. Also, placing growth on a higher trajectory by addressing

structural weaknesses should strengthen the country’s ability to service debt.

Approved By Brian Aitken and Vikram

Haksar (IMF), and Satu

Kahkonen (IDA)

Prepared jointly by the staffs of the International Monetary

Fund and the International Development Association

August 5, 2014

TUVALU


BACKGROUND

1. Being one of the smallest and most isolated countries in the world, Tuvalu faces

tremendous challenges. With a population of some 11,000 people living on 26 square kilometers,

Tuvalu is more than 3,000 kilometers away from its nearest major external market. Despite

substantial, albeit volatile, foreign aid and a boom in the fisheries sector, growth prospects are

hampered by weak competitiveness and capacity, with remoteness causing high transportation cost

and isolation, and the lack of scale increasing transaction cost.

2. The authorities are cognizant of the challenges and have developed a broad reform

agenda. A development strategy and reform package, which were formulated in consultation with

development partners, have been fleshed out in an effort to enhance governance and social

development, facilitate private sector growth, and safeguard macroeconomic stability.

3. The budget achieved a substantial surplus for the second consecutive year in 2013, but

a dramatic increase of budget spending in 2014 has called into question its fiscal

sustainability. The fiscal surplus reached 26.3 percent of GDP, reflecting record high fishing license

fees and higher than expected tax revenue and foreign aid. Nevertheless, the 2014 budget targets a

more than 20 percent expansion of spending, which would be financed by a large temporary

increase of foreign grants and transfers. The substantial fiscal expansion would result eventually in a

depletion of fiscal buffers and accumulation of foreign debt.

4. Meanwhile, the government’s external assets have risen markedly. The Consolidated

Investment Fund (CIF), which serves as a fiscal buffer and is fully controlled by the government of

Tuvalu, has been built up to more than $A 15 million (38 percent of GDP). The Tuvalu Trust Fund

(TTF), which was capitalized by development partners in 1987, has grown from $A130 million in 2012

to more than $A 140 million in 2013 (356 percent of GDP). The TTF is not fully sovereign and is

owned instead by Tuvalu, Australia, and New Zealand, amongst others countries. It cannot be drawn

down freely: when its market value exceeds a “maintained value” indexed to Australian CPI, the TTF

Board—representing both development partners and Tuvalu government—can decide to transfer

the funds in excess of the target income to the CIF. This DSA analyzes gross public debt because of

the limited conditional access to the TTF.

5. Since the previous DSA conducted in 2012, public and publicly guaranteed (PPG) debt

has continued to decline, but is expected to rise as a result of public enterprise borrowing in

the near term. As of end-2013, total PPG debt stood at US$ 14.6 million, equivalent to 41 percent

of GDP. External debt was US$ 12.5 million (35 percent of GDP), and domestic debt—owed to

domestic banks—stood at US$ 2.1 million (6 percent of GDP). Bilateral development partners

provide only grant assistance, while multilateral institutions, most notably the Asian Development

Bank, provided concessional loans to the government. Meanwhile, loans contracted at

nonconcessional terms by two fishing joint ventures established by the National Fishing Corporation

TUVALU


of Tuvalu (NAFICOT) and Asian companies account for a significant share of public debt. These loans

are largely guaranteed by the government, and constitute contingent government liabilities. 1

Recently, one joint venture has been working on a new loan agreement to finance the expansion of

its fishing capacity, which implies a large addition of public debt in the near term—most likely

in 2014 or 2015.

Tuvalu: Public Debt, End-2013

Creditor Outstanding amount

(US$ million)

Outstanding amount

(Percent of GDP)

Concessional

External Debt 12.5 35.3

Central Government Debt ADB 6.2 17.4 Yes

Development Bank Debt EIB 1.4 3.8 No

Fishing Joint Venture Debt Commercial bank 5.0 14.1 No

Domestic debt 2.1 5.8 No

6. This DSA is built on a baseline macroeconomic framework that assumes an

accommodative and procyclical fiscal policy. Without a timely action to cut back the spending

envelope from the 2014 budget level, the fiscal balance would shift into a deficit from 2015

onwards, which would be financed initially by drawing down the CIF, and later, when the CIF is fully

depleted in 2021, by concessional borrowing. This would cause debt-to-GDP ratio to decline over

the medium term as the current debt is amortized, and build up again as new borrowing occurs.

Although weaknesses in the banks and public enterprises could pose large liabilities to the

government, these costs are not assumed in the baseline because of the lack of reliable data—the

cost of addressing banking fragilities needs to be assessed on the basis of a prudent regulation and

resolution framework, while the fiscal cost associated with public enterprise weaknesses should be

estimated in the context of a comprehensive public enterprise reform package.

7. Compared to the previous DSA, the main features of the current macroeconomic

framework can be summarized as follows:

Growth. Real GDP is projected to grow by an average of 2.2 percent per annum over the

medium term and 2 percent over the long run, compared to a constant of 1.2 percent in the

previous DSA.

Inflation. Inflation is projected to reach about 3 percent in the near term and gradually

moderate to below 2 percent in the long run, which is similar to the previous DSA.

1 An effectively defunct and wholly government-owned public enterprise called the National Fishing Corporation of Tuvalu

(NAFICOT) is party to the two fishing joint ventures (JV). NAFICOT owns 50 percent of the JV that was established together with a

company of the Taiwan Province of China, and 40 percent of the Korean one.

TUVALU


Balance of payments. Exports of goods and services are projected to remain stable at

60 percent of GDP over the medium and long run compared to just above 10 percent in the

previous DSA, with the difference reflecting revision to the data to account for large exports by

fishing joint ventures following a recent technical assistance on external account statistics.

Imports of goods and services would peak at 168 percent of GDP in the medium term and

moderate to 115 percent of GDP over the long run; in the previous DSA, imports would peak at

151 percent of GDP over the medium term, and moderate to 112 percent of GDP over the long

run. The current account deficit would widen to 37 percent of GDP over the medium term, and

then narrow to 4.4 percent of GDP by the end of the projection period, a level close to the last

DSA.

Fiscal. Revenue is slightly higher than in the last DSA over the medium term, reflecting buoyant

fishing license fees. However, it is expected to fall to 45 percent of GDP towards the end of the

projection period, compared to 56 percent in the last DSA. Grants as a share of GDP will also fall

over time, reaching 13 percent of GDP by 2034 compared to 17 percent of GDP in the previous

DSA. Expenditures are projected to decline from 100 percent of GDP in 2014 to 62 percent

in 2034, while the last DSA

projected expenditure to be

broadly stable at above

80 percent of GDP.

Discount rate. The discount

rate has been increased from

3 percent in the last DSA to

5 percent, reflecting the most

recent DSA guidelines.

8. Risks to the baseline

scenario are on the downside.

Vulnerabilities in state-owned banks and public enterprises imply large government liabilities.

Uncertainties within the fisheries sector could pose additional risks to revenue and fiscal soundness.

Moreover, a slowdown in advanced and emerging economies, including China, could undermine

activity and reduce job opportunities in the Pacific region, which would weaken the demand for

Tuvaluan seafarers and seasonal workers, adversely affecting Tuvalu’s growth prospects.

DEBT SUSTAINABILITY

A. External Debt

9. Under the baseline scenario, external debt breaches the indicative threshold of debt-

to-GDP ratio for prolonged periods. The threshold for PV of Debt to GDP is determined by the

CPIA index, a measure of the country’s institutional capacity. While the trajectory shows a decline in

debt levels from 52 percent of GDP to just above 20 percent over the medium term, reflecting

amortization of existing loans and no new borrowing in the medium term, increased borrowing only

Tuvalu: Key Macroeconomic Assumptions

(In percent)

2012 DSA 2014 DSA

2012-2017 AVG 2014-2019 AVG

Real GDP growth 1.2 2.2

Inflation (GDP deflator) 1.9 2.1

Current account balance/ GDP 0.5 -11.9

Revenue excluding grants/ GDP 58.5 60.0

Grants/GDP 13.7 24.4

Expenditure/GDP 81.0 87.0

Fiscal Balance/GDP -8.8 -2.2

TUVALU


in the outer years, leading to the full depletion of CIF buffers by 2021. This implies that the debt

trajectory begins to rise again and breaches the threshold by 2029. (Figure 1) The PV of debt-to-

GDP ratio starts at a much higher level than the last DSA, but converges to the level as the last DSA

toward the end of the projection period. The negative contribution of residuals (table 1 and 2) to the

debt trajectory throughout the medium-term horizon is largely driven by withdrawing from external

assets under the CIF.

10. Stress tests show the debt ratios are highly sensitive to exports and exchange rate

shocks. A one-time 30 percent nominal depreciation in 2015 would cause the debt-to-GDP ratio to

stay above the indicative threshold for most of the projection period. A standard shock to exports

also results in a breach of the debt-to-export threshold over the next few years. Also, the threshold

for the debt service-to-exports would be breached for four years over the medium term.

B. Public Debt

11. The PV of public debt to GDP stays above the benchmark over the medium term. The

PV of debt to GDP stands at 58 percent of GDP in 2014, and while declining gradually below the

benchmark of 38 percent over the medium term, would rise again in outer years as new borrowing

occurs after the CIF is depleted, reaching 40 percent of GDP by 2034.2 (Figure 2). Although the

breaching of the benchmark is small, it needs to be interpreted with caution. Since domestic banks

are struggling with large amounts of nonperforming loans and can hardly extend additional

financing on a sustained basis, external borrowing will constitute the main source of public

financing, and debt sustainability analysis based on external debt ratios appears more informative at

this stage. The PV of debt-to-revenue ratio would rise from 50 percent in 2014 to 69 percent

in 2034, while the PV of debt service-to-revenue ratio will fall from 8 percent to 3 percent.

12. Paths of debt indicators are sensitive to alternative assumptions and bound tests. A

one-time 30 percent depreciation would push the PV of debt-to-GDP ratio to peak at 73 percent

in 2015. A standard shock to growth would cause the PV of debt-to-revenue ratio to rise from

50 percent in 2014 to 194 percent in 2034.

C. External and Public DSA under Alternative Scenario

13. Under an alternative scenario where fiscal policy is anchored by an appropriate fiscal

balance target, the risk of debt distress is reduced considerably. Given the volatility of fishing

license fees, targeting a structural balance would help reduce procyclicality—the structural balance

is estimated on the basis of a moving average of fishing license fees over a period of seven years;

fishing license fees in excess of the structural level, i.e. their moving average, would be saved in the

CIF, while it can be drawn down in case fishing license fees fall short of the structural level. In the

case of Tuvalu, targeting a moderate structural surplus implies saving fishing revenues in the current

period given the dramatic increase in fishing license fees in the past few years. Under the alternative

scenario, the fiscal policy targets a structural surplus of 0.5-1 percent of GDP over the medium to

2 The public debt benchmark is derived on empirical basis, and varies among countries with their respective CPIA

score.

TUVALU


long run. As a consequence, CIF buffers would be maintained at a comfortable level, and debt

indicators will improve significantly—the PV of external debt-to-GDP would fall from 53 percent

in 2014 to around 10 percent by 2034.

D. Authorities’ View

14. The authorities broadly concurred with the overall assessment of the Debt-

Sustainability Analysis, but made a couple of observations. First, the authorities, while

recognizing the volatility of fishing revenues, are more optimistic about the near-term outcome, and

expect revenues to be higher than staff projection in the next few years. Second, they indicated that

the fishing joint venture has a favorable outlook, and the probability for the government to assume

the company’s debt obligation is small.

E. Conclusions

15. The results of Tuvalu’s DSA point to a high risk of debt distress, which is the same

conclusion that was drawn in the 2012 DSA. The PV of debt-to-GDP ratio is above the indicative

threshold over the long run. Furthermore, a significant portion of public debt was contracted on

nonconcessional terms, placing further strains on the country’s weak debt servicing capacity.

16. Stress tests show that Tuvalu’s debt dynamics are susceptible to shocks. Standard

shocks in the DSA, particularly the one-time 30 percent nominal depreciation, as well as slower real

GDP growth rates and lower export growth, would cause external debt indicators to breach their

respective thresholds over the long run. Public debt indicators also worsen dramatically under

bound tests.

17. The risk of debt distress is reduced to a moderate level under the alternative scenario

where a modest fiscal structural surplus is implemented. Assuming that the government

maintains a structural surplus of 0.5-1 percent of GDP over the medium and long term, all external

debt indicators would decline below their indicative thresholds.

TUVALU


Box 1. Macroeconomic Assumptions Under Baseline Scenario

Growth and Inflation

Growth is expected to be boosted to about 2.5 percent in the next few years thanks to the

implementation of a few large infrastructure projects financed by grants from development

partners.1/ Over the long term, the growth will moderate to about 2 percent as these projects

are completed. Meanwhile, the share of the public sector in the economy would gradually

decline, while the private sector would play a more important role over time on the back of

great potential in the fisheries sector, which is consistent with the Te Kakeega II development

strategy.

Inflation is projected to rise to about 3 percent in 2014 as a result of increased government

spending and civil servant wages as well as a weakening Australian dollar. Inflation would

moderate gradually to just below 2 percent in the outer years.

Balance of Payments

Current account deficit will peak over the medium term at 37 percent of GDP mainly because of

a spike in imports, and gradually narrow to about 4 percent of GDP over the long run. Reflecting

improved capacity to tap into the marine resources by both public and private enterprises,

fishing exports are expected to double in value over the next 20 years. Driven by large

infrastructure projects and the purchase of fishing ships, imports would rise substantially in the

next few years, and grow moderately thereafter. The trade balance will move into a deficit over

the medium term, and return to a moderate surplus in 2018 and onwards.

FDI inflows would be minimal and mostly include reinvestment of fishing joint venture earnings.

Despite efforts of the authorities to privatize certain public enterprises, there has been little

success in attracting foreign investors, and therefore no significant FDI inflows associated with

privatization are assumed.

Fiscal Policy and Financing

Fishing license fees are projected conservatively at around A$14 million in 2014-2019 and to

gradually decline to A$11 million over the long run reflecting the adverse impact of overfishing

and climate change.

Foreign grants to the budget are expected to decline gradually from 51 percent of GDP in 2014

to 13 percent of GDP by 2034. It is assumed that the government’s implementation of reforms

induces continued support from development partners.

Given the weakening fishing license fees and foreign grants, expenditures would be compressed

gradually from nearly 100 percent of GDP in 2014 to 62 percent of GDP by 2034. This decline

also reflects a reduced share of the public sector in the economy, which makes space for the

private sector to grow.

The overall fiscal deficit will hover around 5-7 percent of GDP over the medium term, and

decline gradually to just above 4 percent of GDP by 2034. The convergence of fiscal deficit

toward current account balance also points to the importance of maintaining a sound fiscal

policy to safeguard competitiveness and economic stability. Financing of fiscal deficits would be

mostly from external borrowing, while domestic banks suffer from severe asset quality problems

and are not capable of providing sustainable financing over the long term.

_______________________________________________

1/ These expenditures would be extrabudgetary.

TUVALU


Figure 1. Tuvalu: Indicators of Public and Publicly Guaranteed External Debt Under

Alternative Scenarios, 2014–2034 1/

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a

Alternative (policy adjustment) shock; in c. to a Alternative (policy adjustment) shock; in d. to a Alternative (policy

adjustment) shock; in e. to a Alternative (policy adjustment) shock and in figure f. to a Alternative (policy adjustment)

shock

Baseline Historical scenario Most extreme shock 1/

Threshold Alternative (policy adjustment)

0

2

4

6

8

10

12

14

16

18

20

2014 2019 2024 2029 2034

f.Debt service-to-revenue ratio

20

25

30

35

40

45

50

55

60

65

70

-10

0

10

20

30

40

50

60

2014 2019 2024 2029 2034

Rate of Debt Accumulation

Grant-equivalent financing (% of GDP)

Grant element of new borrowing (% right scale)

a. Debt Accumulation

0

20

40

60

80

100

120

140

2014 2019 2024 2029 2034

c.PV of debt-to-exports ratio

0

10

20

30

40

50

60

70

80

2014 2019 2024 2029 2034

b.PV of debt-to GDP ratio

0

50

100

150

200

250

2014 2019 2024 2029 2034

d.PV of debt-to-revenue ratio

0

2

4

6

8

10

12

14

16

18

20

2014 2019 2024 2029 2034

e.Debt service-to-exports ratio

TUVALU


Figure 2. Tuvalu: Indicators of Public Debt Under Alternative Scenarios, 2014–2034 1/

Most extreme shock One-time depreciation

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.

2/ Revenues are defined inclusive of grants.

Baseline

Public debt benchmark

Most extreme shock 1/

Historical scenario

Fix Primary Balance

Alternative (policy adjustment)

0

50

100

150

200

250

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

PV of Debt-to-Revenue Ratio 2/

0

10

20

30

40

50

60

70

80

90

100

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

PV of Debt-to-GDP Ratio

0

2

4

6

8

10

12

14

16

18

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

Debt Service-to-Revenue Ratio 2/

TUVALU


Table 1. Tuvalu: External Debt Sustainability Framework, Baseline Scenario, 2011–2034


Historical 6/ Standard 6/

Average Deviation 2014-2019 2020-2034

2011 2012 2013 2014 2015 2016 2017 2018 2019 Average 2024 2034 Average

External debt (nominal) 1/ 40.7 36.4 35.3 52.0 44.6 37.9 32.1 25.5 20.3 35.6 68.6

of which: public and publicly guaranteed (PPG) 40.7 36.4 35.3 52.0 44.6 37.9 32.1 25.5 20.3 35.6 68.6

Change in external debt -9.9 -4.3 -1.1 16.7 -7.4 -6.7 -5.8 -6.6 -5.2 5.0 2.3

Identified net debt-creating flows 27.2 -30.1 -26.9 -30.1 34.2 20.1 16.2 6.8 8.6 3.4 1.3

Non-interest current account deficit 34.7 -26.9 -27.9 -0.7 23.7 -29.7 34.7 20.8 16.9 7.7 9.6 5.3 3.4 4.7

Deficit in balance of goods and services 98.7 51.7 63.4 73.4 106.7 89.6 78.0 60.8 61.1 56.4 54.6

Exports 37.8 62.8 62.9 61.9 61.1 60.5 60.2 60.0 59.9 59.9 59.9

Imports 136.5 114.4 126.3 135.3 167.8 150.1 138.2 120.8 121.0 116.2 114.5

Net current transfers (negative = inflow) -37.6 -52.6 -45.4 -45.9 8.4 -55.5 -35.8 -35.3 -29.3 -22.9 -22.6 -22.9 -22.5 -22.8

of which: official -40.9 -56.1 -48.6 -58.6 -38.9 -38.4 -32.4 -26.0 -25.7 -26.1 -25.6

Other current account flows (negative = net inflow) -26.4 -26.0 -45.9 -47.7 -36.2 -33.5 -31.8 -30.2 -28.9 -28.2 -28.6

Net FDI (negative = inflow) 0.3 -4.2 -1.8 -1.6 2.3 -1.8 -1.8 -1.8 -1.8 -1.8 -1.8 -1.8 -1.8 -1.8

Endogenous debt dynamics 2/ -7.8 1.0 2.9 1.5 1.3 1.1 1.1 0.9 0.8 0.0 -0.3

Contribution from nominal interest rate 1.7 1.6 1.5 2.3 2.5 2.2 1.8 1.5 1.2 0.5 1.0

Contribution from real GDP growth -3.5 -0.1 -0.5 -0.8 -1.2 -1.1 -0.7 -0.6 -0.5 -0.5 -1.3

Contribution from price and exchange rate changes -6.1 -0.5 1.9 … … … … … … … …

Residual (3-4) 3/ -37.0 25.7 25.8 46.8 -41.6 -26.8 -22.0 -13.4 -13.8 1.6 1.0

of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PV of external debt 4/ ... ... 34.5 52.9 45.5 38.8 33.1 26.6 21.4 19.9 38.9

In percent of exports ... ... 54.9 85.6 74.4 64.1 55.0 44.3 35.8 33.3 64.9

PV of PPG external debt ... ... 34.5 52.9 45.5 38.8 33.1 26.6 21.4 19.9 38.9

In percent of exports ... ... 54.9 85.6 74.4 64.1 55.0 44.3 35.8 33.3 64.9

In percent of government revenues ... ... 41.6 82.0 69.4 64.8 56.1 46.4 38.3 38.8 86.8

Debt service-to-exports ratio (in percent) 19.4 11.2 11.6 12.8 13.2 12.5 10.7 11.7 9.4 1.4 3.1

PPG debt service-to-exports ratio (in percent) 19.4 11.2 11.6 12.8 13.2 12.5 10.7 11.7 9.4 1.4 3.1

PPG debt service-to-revenue ratio (in percent) 15.4 12.5 8.8 12.2 12.3 12.6 10.9 12.2 10.1 1.7 4.1

Total gross financing need (Millions of U.S. dollars) 16.6 -9.6 -8.6 -9.1 16.7 11.1 9.3 5.7 6.2 2.3 2.7

Non-interest current account deficit that stabilizes debt ratio 44.5 -22.6 -26.9 -46.5 42.1 27.4 22.7 14.3 14.8 0.2 1.1

Key macroeconomic assumptions

Real GDP growth (in percent) 8.5 0.2 1.3 1.4 4.9 2.2 2.5 2.5 1.9 2.0 1.9 2.2 1.8 2.1 1.9

GDP deflator in US dollar terms (change in percent) 13.6 1.3 -4.9 6.6 9.1 -1.9 3.3 0.3 0.6 1.4 1.1 0.8 1.5 1.6 1.6

Effective interest rate (percent) 5/ 4.1 4.0 4.0 2.7 1.4 6.4 5.1 5.1 4.8 4.8 4.9 5.2 1.7 1.6 2.1

Growth of exports of G&S (US dollar terms, in percent) 5.4 68.5 -3.5 33.8 46.9 -1.2 4.5 1.7 2.0 3.0 2.8 2.1 3.4 3.6 3.5

Growth of imports of G&S (US dollar terms, in percent) 27.7 -15.0 6.4 10.7 20.3 7.5 31.2 -8.1 -5.6 -9.7 3.2 3.1 2.6 3.6 3.1

Grant element of new public sector borrowing (in percent) ... ... ... ... ... -5.1 61.1 61.1 61.1 61.1 61.1 50.1 52.2 52.2 52.8

Government revenues (excluding grants, in percent of GDP) 47.8 56.6 82.9 64.6 65.6 59.9 59.0 57.3 56.0 51.4 44.7 49.2

Aid flows (in Millions of US dollars) 7/ 8.3 11.1 9.4 19.8 9.0 9.4 7.4 7.5 7.5 11.4 13.9

of which: Grants 8.3 11.1 9.4 19.8 9.0 9.4 7.4 7.5 7.5 7.9 9.6

of which: Concessional loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.4 4.2

Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 50.1 22.1 22.5 17.3 16.8 16.3 18.1 15.4 17.2

Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 64.8 100.0 100.0 100.0 100.0 100.0 85.6 85.4 86.1

Memorandum items:

Nominal GDP (Millions of US dollars) 39.3 39.9 38.4 38.6 40.8 42.0 43.0 44.5 45.8 53.9 76.9

Nominal dollar GDP growth 23.2 1.5 -3.6 0.3 5.8 2.8 2.5 3.4 3.0 3.0 3.4 3.6 3.5

PV of PPG external debt (in Millions of US dollars) 12.3 20.7 18.4 16.2 14.2 11.8 9.8 10.7 29.8

(PVt-PVt-1)/GDPt-1 (in percent) 21.8 -5.8 -5.5 -4.7 -5.6 -4.5 -0.7 3.1 2.7 2.1

Gross workers' remittances (Millions of US dollars) 4.6 3.8 3.7 3.7 3.8 3.9 4.0 4.1 4.2 4.9 7.0

PV of PPG external debt (in percent of GDP + remittances) ... ... 31.5 48.4 41.6 35.5 30.3 24.3 19.6 18.3 35.6

PV of PPG external debt (in percent of exports + remittances) ... ... 47.6 74.2 64.5 55.6 47.7 38.4 31.1 28.9 56.3

Debt service of PPG external debt (in percent of exports + remittances) ... ... 10.1 11.1 11.4 10.9 9.3 10.2 8.2 1.2 2.7

Sources: Country authorities; and staff estimates and projections. 0

1/ Includes both public and private sector external debt.

2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

4/ Assumes that PV of private sector debt is equivalent to its face value.

5/ Current-year interest payments divided by previous period debt stock.

6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

7/ Defined as grants, concessional loans, and debt relief.

8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Actual Projections

3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

TUVALU


Table 2. Tuvalu: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–2034


Estimate

2011 2012 2013Average

5/ Standard

Deviation

5/

2014 2015 2016 2017 2018 2019

2014-19

Average 2024 2034

2020-34

Average

Public sector debt 1/ 45.3 43.0 41.1 56.9 48.6 41.2 33.4 26.7 21.5 36.5 69.3

of which: foreign-currency denominated 40.7 36.4 35.3 52.0 44.6 37.9 32.1 25.5 20.3 35.6 68.6

Change in public sector debt -10.3 -2.3 -1.9 15.8 -8.3 -7.4 -7.8 -6.6 -5.2 5.0 2.3

Identified debt-creating flows 4.0 -10.7 -21.8 -19.2 2.4 4.1 6.5 5.0 4.4 4.9 2.0

Primary deficit 7.0 -11.2 -28.3 8.9 18.7 -18.3 1.6 3.1 5.8 4.6 3.9 0.1 5.4 3.4 4.5

Revenue and grants 69.0 84.3 107.5 116.0 87.6 82.4 76.3 74.0 72.2 66.1 57.3

of which: grants 21.2 27.8 24.6 51.4 22.1 22.5 17.3 16.8 16.3 14.7 12.5

Primary (noninterest) expenditure 76.0 73.1 79.1 97.8 89.2 85.4 82.1 78.7 76.2 71.5 60.6

Automatic debt dynamics -3.1 0.5 6.5 -1.0 0.8 1.0 0.8 0.4 0.4 -0.5 -1.4

Contribution from interest rate/growth differential -3.4 1.1 0.7 1.0 0.5 0.4 0.4 0.2 0.2 -0.6 -1.6

of which: contribution from average real interest rate 0.9 1.1 1.2 1.9 1.9 1.6 1.2 0.9 0.7 -0.1 -0.2

of which: contribution from real GDP growth -4.3 -0.1 -0.5 -0.9 -1.4 -1.2 -0.8 -0.6 -0.5 -0.6 -1.3

Contribution from real exchange rate depreciation 0.4 -0.6 5.8 -1.9 0.3 0.7 0.4 0.2 0.2 ... ...

Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Residual, including asset changes -14.3 8.4 19.9 35.0 -10.6 -11.5 -14.4 -11.7 -9.6 0.1 0.3

Other Sustainability Indicators

PV of public sector debt ... ... 40.3 57.9 49.6 42.1 34.3 27.8 22.6 20.9 39.6

of which: foreign-currency denominated ... ... 34.5 52.9 45.5 38.8 33.1 26.6 21.4 19.9 38.9

of which: external ... ... 34.5 52.9 45.5 38.8 33.1 26.6 21.4 19.9 38.9

PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ...

Gross financing need 2/ 14.3 -3.6 -19.9 -9.3 10.6 11.5 14.3 11.6 9.6 6.3 5.2

PV of public sector debt-to-revenue and grants ratio (in percent) … … 37.5 49.9 56.6 51.1 45.0 37.5 31.3 31.7 69.1

PV of public sector debt-to-revenue ratio (in percent) … … 48.6 89.6 75.6 70.3 58.2 48.5 40.4 40.8 88.4

of which: external 3/ … … 41.6 82.0 69.4 64.8 56.1 46.4 38.3 38.8 86.8

Debt service-to-revenue and grants ratio (in percent) 4/ 10.6 9.0 7.8 7.7 10.2 10.2 11.3 9.5 7.8 1.3 3.2

Debt service-to-revenue ratio (in percent) 4/ 15.4 13.5 10.2 13.8 13.7 14.1 14.6 12.2 10.1 1.7 4.1

Primary deficit that stabilizes the debt-to-GDP ratio 17.3 -8.9 -26.4 -34.1 9.9 10.5 13.6 11.3 9.2 0.4 1.0

Key macroeconomic and fiscal assumptions

Real GDP growth (in percent) 8.5 0.2 1.3 1.4 4.9 2.2 2.5 2.5 1.9 2.0 1.9 2.2 1.8 2.1 1.9

Average nominal interest rate on forex debt (in percent) 4.1 4.0 4.0 2.7 1.4 6.4 5.1 5.1 4.8 4.8 4.9 5.2 1.7 1.6 2.1

Average real interest rate on domestic debt (in percent) ... 5.0 5.5 5.3 0.3 4.5 4.5 4.6 4.6 ... ... 4.5 ... ... …

Real exchange rate depreciation (in percent, + indicates depreciation) 0.7 -1.3 15.8 -0.9 14.2 -5.4 ... ... ... ... ... ... ... ... ...

Inflation rate (GDP deflator, in percent) 1.3 0.9 1.8 2.1 1.8 2.7 2.6 2.3 2.2 2.0 1.8 2.2 1.5 1.6 1.6

Growth of real primary spending (deflated by GDP deflator, in percent) -11.7 -3.6 9.6 -21.2 65.3 26.3 -6.5 -1.9 -2.1 -2.2 -1.4 2.0 0.0 1.0 0.4

Grant element of new external borrowing (in percent) ... ... ... … … -5.1 61.1 61.1 61.1 61.1 61.1 50.1 52.2 52.2 ...


1/ [Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

3/ Revenues excluding grants.

4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.

5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Actual Projections

TUVALU


Table 3. Tuvalu: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed

External Debt, 2014–2034

(In percent)

2014 2015 2016 2017 2018 2019 2024 2034

Baseline 53 45 39 33 27 21 20 39

A. Alternative Scenarios

A1. Key variables at their historical averages in 2014-2034 1/ 53 24 4 0 0 0 0 0

A2. New public sector loans on less favorable terms in 2014-2034 2 53 45 39 37 33 31 44 82

B. Bound Tests

B1. Real GDP growth at historical average minus one standard deviation in 2015-2016 53 48 43 37 30 24 22 44

B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/ 53 51 54 49 43 38 36 48

B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016 53 48 42 36 29 23 22 42

B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/ 53 46 39 34 27 22 20 39

B5. Combination of B1-B4 using one-half standard deviation shocks 53 44 31 24 17 12 10 35

B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/ 53 64 54 46 37 30 28 55

Baseline 86 74 64 55 44 36 33 65




B. Bound Tests







Baseline 82 69 65 56 46 38 39 87




B. Bound Tests







PV of debt-to-exports ratio

PV of debt-to-revenue ratio

PV of debt-to GDP ratio

Projections

TUVALU


Table 3. Tuvalu: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed

External Debt, 2014–2034 (concluded)

(In percent)

Baseline 13 13 13 11 12 9 1 3




B. Bound Tests







Baseline 12 12 13 11 12 10 2 4




B. Bound Tests







Memorandum item:

Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 43 43 43 43 43 43 43 43


1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming

an offsetting adjustment in import levels).

4/ Includes official and private transfers and FDI.

5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Debt service-to-revenue ratio

Debt service-to-exports ratio

TUVALU


Table 4. Tuvalu: Sensitivity Analysis for Key Indicators of Public Debt 2014–2034

2014 2015 2016 2017 2018 2019 2024 2034

Baseline 58 50 42 34 28 23 21 40

A. Alternative scenarios

A1. Real GDP growth and primary balance are at historical averages 58 54 51 45 41 38 47 94

A2. Primary balance is unchanged from 2014 58 38 18 0 0 0 0 0

A3. Permanently lower GDP growth 1/ 58 50 44 38 33 29 43 118

B. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2015-2016 58 55 54 50 47 45 62 114

B2. Primary balance is at historical average minus one standard deviations in 2015-2016 58 65 72 64 57 52 51 65

B3. Combination of B1-B2 using one half standard deviation shocks 58 61 64 58 53 50 59 95

B4. One-time 30 percent real depreciation in 2015 58 73 64 56 48 42 30 41

B5. 10 percent of GDP increase in other debt-creating flows in 2015 58 56 48 40 33 28 27 45

Baseline 50 57 51 45 38 31 32 69


A1. Real GDP growth and primary balance are at historical averages 50 62 61 58 54 53 71 161A2. Primary balance is unchanged from 2014 50 43 21 0 0 0 0 0A3. Permanently lower GDP growth 1/ 50 57 53 49 44 40 63 196

B. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2015-2016 50 62 64 64 61 60 92 194B2. Primary balance is at historical average minus one standard deviations in 2015-2016 50 74 88 84 76 71 77 114B3. Combination of B1-B2 using one half standard deviation shocks 50 69 77 75 70 68 89 163B4. One-time 30 percent real depreciation in 2015 50 83 78 73 65 58 45 72B5. 10 percent of GDP increase in other debt-creating flows in 2015 50 63 58 52 45 39 41 78

Baseline 8 10 10 11 9 8 1 3


A1. Real GDP growth and primary balance are at historical averages 8 10 11 13 11 9 3 9

A2. Primary balance is unchanged from 2014 8 10 10 8 5 2 0 0

A3. Permanently lower GDP growth 1/ 8 10 10 12 10 9 3 10

B. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2015-2016 8 11 11 13 12 10 4 11

B2. Primary balance is at historical average minus one standard deviations in 2015-2016 8 10 11 16 14 9 2 7

B3. Combination of B1-B2 using one half standard deviation shocks 8 11 11 15 13 10 3 9

B4. One-time 30 percent real depreciation in 2015 8 12 14 15 14 12 3 6

B5. 10 percent of GDP increase in other debt-creating flows in 2015 8 10 10 13 10 8 2 4


1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

2/ Revenues are defined inclusive of grants.

PV of Debt-to-GDP Ratio

Projections

PV of Debt-to-Revenue Ratio 2/

Debt Service-to-Revenue Ratio 2/

Press Release No. 14/398

FOR IMMEDIATE RELEASE

August 28, 2014

IMF Executive Board Concludes 2014 Article IV Consultation with Tuvalu

On August 25, 2014, the Executive Board of the International Monetary Fund (IMF) concluded

the Article IV consultation1 with Tuvalu.

Growth is picking up modestly on a generally stable outlook, and inflation has been moderate.

Activity has benefited from increased competition in the retail sector and a recent boom in the

fisheries sector as well as development partners’ support, while banking weaknesses have

constrained financial support for the private sector, and the poorly managed public enterprises

have strained government finances and hampered the country’s business climate.

The balance of payments has been supported by large fishing-related receipts and official aid.

Fishing exports and receipts of fishing license fees have more than doubled in the past few years,

and official aid by development partners has also risen sharply. Remittances, however, have

shrunk markedly since the global financial crisis largely as a result of limited human capacity

and weak competitiveness. Meanwhile, imports have been generally stable on account of

restrained budget spending until recently. As a result, foreign exchange reserves have risen to 8

months of imports.

The fiscal policy achieved a substantial surplus in 2013. In addition to record high fishing license

fees, tax revenues also outperformed the budget mainly because of improved compliance by

public enterprises. The favorable revenue has been reinforced by higher-than-expected foreign

grants. As a result, fiscal buffers have been built up to comfortable levels. However, a large

budget expansion in 2014 has increased risks to fiscal sustainability. The 2014 budget envisages

a more than 20 percent increase in expenditures, mostly current spending, which is financed by a

temporary large increase in foreign grants and transfers—once it is unwound, the fiscal balance

would likely move into a significant deficit over the medium term.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually

every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

2

Vulnerabilities in banks and public enterprises could compound fiscal risks. The unsupervised

state-owned banking system suffers from severe asset quality problems. Non-bank public

enterprises continue to make losses as a whole, reflecting weak governance and the cost of

assuming social responsibilities. These weaknesses could ultimately result in a large increase in

public liabilities.

Executive Board Assessment2

Executive Directors welcomed the authorities’ significant progress in implementing reforms on a

broad front, in particular as regards public financial management. They noted that, while

Tuvalu’s growth prospects over the medium term are generally positive, debt sustainability

remains a key concern, and vulnerabilities in banks and public enterprises pose large fiscal risks.

Challenges arising from climate change and Tuvalu’s remoteness and small size also need to be

addressed.

Directors called for urgent actions to strengthen the fiscal position. While buffers have been built

up in the past two years as revenues over-performed, the budget expansion in 2014 could

undermine debt sustainability. Accordingly, they encouraged the authorities to unwind this

expansion by cutting expenditures, keeping public sector wages aligned with productivity

growth, and rationalizing social spending. More broadly, the adoption of a medium-term fiscal

framework that targets a structural budget surplus and builds up savings will boost resilience

against adverse shocks.

Directors also underscored the importance of further reform of public enterprises that continue to

burden the budget. They encouraged the authorities to enhance the transparency and

accountability of these entities and better identify their social responsibilities. Stricter control of

public guarantees will also be needed, going forward.

Directors expressed concern about unaddressed fragilities in the banking system. They

encouraged the authorities to take actions to resolve nonperforming loans and develop

contingency plans. More broadly, they recommended the establishment of a sound regulatory

framework and a comprehensive review of bank balance sheets. In this context, Directors

welcomed the decision to set up a banking commission that will play a key role in ensuring

financial stability.

Directors took note of the staff assessment that Tuvalu’s real effective exchange rate is broadly

in line with fundamentals. Nonetheless, they emphasized that continued reforms are essential to

enhance competitiveness. They encouraged the authorities to implement the next phase of the

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of

Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

http://www.imf.org/external/np/sec/misc/qualifiers.htm

3

Policy Reform Matrix, and highlighted the importance of strengthening education as well as the

institutional capacity of the public sector, including as regards the compilation of economic

statistics. Continued engagement with development partners will be key to mitigate the effects of

climate change.

4

Tuvalu: Selected Social and Economic Indicators, 2010–2015 1/

2010 2011 2012 2013 2014 2015

Est. Proj.

(Percent change)

Real sector

Real GDP growth -2.7 8.5 0.2 1.3 2.2 2.5

Consumer price inflation (period average) -1.9 0.5 1.4 2.0 3.3 3.1

(In percent of GDP)

Government finance

Revenue and grants 71.9 69.0 84.3 107.5 116.0 87.6

Revenue 55.5 47.8 56.6 82.9 64.6 65.6

of which: Tax revenue 16.5 16.9 15.0 19.0 15.1 18.0


Grants 2/ 16.4 21.2 27.8 24.6 51.4 22.1

Total expenditure 95.7 77.9 75.0 81.1 100.2 92.1

Current expenditure 92.5 76.1 75.0 81.0 100.1 91.9

of which: Wages and salaries 33.8 31.3 31.9 32.2 38.0 36.2

Capital expenditure and net lending 3.2 1.8 0.0 0.2 0.2 0.2

Overall balance -23.8 -8.9 9.3 26.3 15.8 -4.4

Extra budgetary grants 3/ 31.8 21.2 29.3 25.2 25.7 31.4

Tuvalu Trust Fund (stock, $A million) 108 119 131 141 146 145

Consolidated Investment Fund (stock, $A million) 7.2 3.2 4.5 14.5 20.6 18.2

(Percent change, unless otherwise indicated)

Money and credit

Deposits -8.3 8.6 9.7 29.3 9.5 …

Credit 0.9 15.1 -11.4 -7.7 0.8 …

Lending interest rate (in percent) 4/ 10.6 10.6 10.6 10.6 10.6 …


Balance of payments

Current account balance -4.1 -13.9 9.8 10.5 11.5 -16.3

(In percent of GDP) -11.9 -36.5 25.3 26.4 27.7 -37.2

of which:

Exports of goods 10.9 10.2 19.9 20.5 21.1 21.9

ow/ Fish 10.4 9.4 19.5 20.1 20.7 21.4

Imports of goods -17.3 -17.6 -16.7 -19.1 -22.3 -35.8


Current transfers (net) 15.2 14.3 20.3 18.0 23.1 15.7

ow/Remittances 4.3 4.4 3.7 3.8 4.0 4.1

Capital and financial account balance 10.0 12.3 0.8 1.2 0.5 13.4

of which: .TV domain license fees 2.0 1.9 3.7 4.4 4.1 4.1

Capital transfers (net) 7.5 12.3 4.7 5.1 5.8 9.1

Gross official reserves 5/ 26.6 24.1 27.5 36.5 48.5 45.6

(In months of next year's imports) 6.1 6.6 6.6 7.8 7.9 7.9


Debt indicators

Gross public debt 55.6 45.3 43.0 41.1 56.9 48.6

External 50.6 40.7 36.4 35.3 52.0 44.6

Domestic 5.1 4.6 6.7 5.8 4.9 4.1

Exchange rates

Australian dollars per U.S. dollar (period average) 1.1 1.0 1.0 1.0 … …

Nominal effective exchange rate (2005=100) 111.2 119.1 122.7 123.7 … …

Real effective exchange rate (2005=100) 108.3 111.0 112.4 110.6 … …

Nominal GDP (In millions of Australian dollars) 34.7 38.1 38.5 39.7 41.7 43.8

Sources: Tuvalu authorities; PFTAC; SPC; ADB; World Bank; and IMF staff estimates and projections.

1/ Tuvalu uses the Australian dollar as its currency. It has no central bank.



4/ Average of personal, business, overdraft, and housing loans.

5/ Defined as the sum of foreign assets of the National Bank of Tuvalu, the Consolidated Investment Fund, and SDR holdings.

Statement by Jong-Won Yoon, Executive Director for Tuvalu

and Kyounghwan. Moon, Senior Advisor to Executive Director

August 25, 2014

On behalf of the Tuvaluan authorities, we would like to thank staff for their constructive

policy discussions and a well-written report. This is the third Article IV consultation between

staff and the authorities since Tuvalu joined the Fund in 2010. The authorities are broadly in

line with staff assessments, including policy actions for securing fiscal sustainability,

financial stability, and structural reforms. We would like to express the authorities’ deep

appreciation to the Fund and development partners for their assistance. The authorities look

forward to continued close engagement with the Fund and development partners.

Tuvalu is the smallest and the least populous member country in the Fund, with the

population of slightly above ten thousand and comprised of nine reef atoll islands. Its unique

features of smallness and remoteness, like other Pacific island countries, as well as the

absence of natural resources apart from tuna in the territorial waters impose severe

constraints on Tuvalu’s development. As part of the global community, its economy is not

immune to global economic shocks such as food and oil prices. Tuvalu is one of the most

vulnerable countries due to its lack of economies of scale and limited infrastructure and

capabilities. As low-lying islands at no more than 15 feet above sea level, Tuvalu is

particularly susceptible to climate change. Despite these challenges, the authorities will

continue their efforts to build adequate policy buffers for enhancing economic resilience to

achieve sustainable growth, along with continued assistance from the international

community.

Economic Outlook

The economic growth of Tuvalu has been showing moderate recovery. In 2013, GDP is

estimated to have increased by 1.3 percent, which is slightly higher than the growth in 2012,

mainly due to the increases of revenues in the fisheries sector1 and grants from development

partners. GDP is expected to further increase by over 2 percent with the implementation of

large infrastructure projects, including upgrading airport runaways, financed by development

partners over the medium term.

Inflation has stabilized below 2 percent over the last years benefiting from lower global

food and fuel prices but there are signs of slight upward pressures. The 2013 price inflation

was 2 percent, but it is expected to pick up with the increase of government expenditures and

weakening Australian dollar, which is Tuvalu’s legal tender.

1 In 2013, fishing license fees increased to AUS$ 18 million (45 percent of GDP) from AUS$ 8 million in 2012.

The authorities expect this high level of fishing license fees would be maintained over the next 3 or 4 years thanks to

El Niño.

http://endic.naver.com/enkrEntry.nhn?entryId=44dde6739ea4419e8a1e4740e39bbe51&query=El-nino

http://endic.naver.com/enkrEntry.nhn?entryId=44dde6739ea4419e8a1e4740e39bbe51&query=El-nino

Balance of payment has improved but is subject to large uncertainties. In 2013, the current

account surplus is estimated to be 25 percent of GDP and gross official reserves are expected to

reach around 8 months of imports. However, there remain uncertainties over current account

surplus, given Tuvalu’s heavy dependence on its uncertain sources of fishing exports, fishing

license fees and foreign aid.

Fiscal policy

Tuvalu achieved its second consecutive fiscal surplus of AUS$ 10.5 million, around

26 percent of GDP, in 2013. For the first time since 2002, total domestic revenue excluding

grants exceeded total expenditure. This positive fiscal performance has strengthened the

government’s financial position. The Consolidated Investment Fund (CIF), which serves as a

fiscal buffer, increased to AUS$ 19.9 million, around 48 percent of GDP as of March 2014. At

this level, the CIF would be able to assist the authorities to finance unexpected budget financing

gaps for several years.

The authorities agree that ensuring fiscal sustainability is crucial. While the 2014 total

government expenditure has increased about 20 percent from the 2013 level, total revenue is

also expected to increase, targeting fiscal surplus in 2014. The authorities are aware of the fiscal

risks given the bumpy revenue streams and will continue their effort to rein in expenditure and

broaden tax base.

Wages have increased by 25 percent in 2014, but this is the first increase since 2010 and

the increase is about AUS$ 720/year for 900 government employees, who make up about

two thirds of employees in the formal labor market. The authorities will make efforts to

establish the proper wage-setting mechanism to avoid a sharp increase of wages.

Under the Tuvalu Scholarship Program, about 30 students receive scholarships each year.

Extending their studies has resulted in an increase of its cost, and the authorities will

enhance the monitoring of the performance so as to ensure the effectiveness of the

program.

Because of the limited medical facilities in Tuvalu, the authorities have sent patients to

Fiji, India, and New Zealand under the Tuvalu Medical Treatment System. The

authorities are aware of the risk of its potential overspending and will continue to make

efforts to improve its cost effectiveness through establishing a comprehensive database in

addition to limiting referrals within available budget funds.

The Tuvalu Cooperative Society (TCS) is the main wholesaler and retailer in Tuvalu and

the authorities are considering the re-starting of assistance to the TCS to provide basic

foods to the outer islands. The authorities would carefully seek the most cost effective

way to achieve the goal of ensuring food security.

The authorities have strengthened their audit program for tax collection since the arrival

of a tax advisor in 2012. Implementation of audit on public enterprises contributed to the

increase of tax compliance in 2013. The authorities plan to start audit on the private sector

in 2014 and enhance their enforcement capacity.

The authorities welcome staff’s proposal of introducing a medium term fiscal framework

targeting a structural fiscal surplus. The main purpose of establishing the Tuvalu Trust Fund

(TTF) in 1987 is to have a rainy day fund for Tuvalu. The authorities believe that the current

TTF and CIF scheme has served Tuvalu well, but they also consider that combining the

operation of the TTF with a medium term fiscal framework could help build fiscal buffers and

ensure fiscal sustainability. The authorities would be open to further discussion with staff.

Strengthening public financial management will continue to be one of the main policy

priorities in Tuvalu. A Central Procurement Unit has been established to oversee the

purchases of goods and services. The new procurement rules would ensure the efficient use of

budget and promote transparency of the procurement process.

Banking Sector

The authorities agree with staff that supervisory and regulatory framework in the

banking sector needs to be strengthened. The authorities are in the process of setting up the

Banking Commission, which will play a role of ensuring financial stability. The authorities will

also make efforts to improve the prudence of the banking system. Given the limited

infrastructure in the banking sector, financial services are restricted to a small number of people

and access of outer islanders is constrained. The authorities are mindful of capacity constraints

and would be grateful of technical or financial assistance from the Fund and development

partners to strengthen the financial system.

Structural Reforms

The authorities are committed to further strengthening public enterprise reform. All of

civil servants have resigned from Board positions in public enterprises (PEs). Recruiting

process is under way for staffing the Public Enterprise Reform and Management Unit. The

authorities are also working with the Asian Development Bank on public enterprise reform to

improve governance, administration and profitability of PEs. Given the lack of economies of

scale in Tuvalu, it is to some extent inevitable for PEs to bear a part of burden in providing

their services. Moreover, it is hard to distinguish between commercial activities and social

responsibilities. The authorities will continue to explore ways to improve efficiency of PEs.

The Tuvaluan authorities will continue their well-known reform efforts. Tuvalu’s National

Strategy for Sustainable Development for 2005 to 2015, Te Kakeega II, was set focusing on the

eight strategic areas including good governance, macroeconomic growth and stability and

social development. The second phase of Policy Reform Matrix has been complete and the third

phase is scheduled to start in the second half of this year, integrated with the government’s 2013

reform roadmap. Tuvalu’s development achievement has been acknowledged in the areas of

strengthened budgetary management and improved school attendance. The authorities will put

renewed focus on increased government investment in primary education and health services in

addition to gender equality.

tuvalu: 2014 article iv consultation—staff report; press ... · imf country report no. 14/253...

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